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How to Structure Your Portfolio for Tax Optimization


How to Structure Your Portfolio for Tax Optimization


Let me start by saying that everyone’s investment objectives are different and if you have not spoken to a Registered Investment Advisor or a Certified Financial Planner, you should. See Vanguard’s “Advisor Alpha” study for more information.

With that out of the way, here are three steps that you can take now for tax optimization in your portfolio:

Asset Allocation

Asset allocation is the implementation of your investment strategy that attempts to balance risk versus reward. More simply, this is the adjustment of your % of asset classes. The three main asset classes include equities, fixed-income, and cash its equivalents in diminishing order of risk and reward. 

In general, as an investor ages and nears retirement, they will want to increase their allocation of less risky assets such as fixed-income bonds and similar holdings.

The old general rule of thumb for a retirement account’s asset allocation of stocks and bonds is to subtract the investor’s age from 100 to determine the % of the portfolio that should be held in stocks. For example, a 70-year old would be 30% invested in stocks. However, with American workers living and working longer than ever, I would very much recommend having a conversation with a professional about your risk tolerance and time horizon prior to making a decision on asset allocation.

Asset Location

Once you have determined an asset allocation plan, we can start exploring which types of accounts to place those assets in. 

There are three general tax categories which are taxable, tax-deferred, and tax-free. These accounts include taxable brokerage accounts; tax-deferred 401(k)’s, 403(b)’s, IRA’s, and SEP IRA’s; and tax-free Roth IRA’s, Roth 401(k)’s, Roth 403(b)’s, and HSA accounts. It should also be noted that the HSA accounts allow for pre-tax contributions, tax-free growth, and tax-free withdrawals as long as the funds are used for qualified medical expenses. This triple tax benefit is unique to HSA accounts. 

The second step to asset location, after determining which accounts will work for you, is to place the least tax-efficient investments into the most tax-efficient accounts and vice/versa with the most tax-efficient investments going into the most-taxed accounts. For example, high-yield bonds will generally be the least tax-efficient investments in your portfolio, so you will want to place those in your most tax-efficient accounts. Stocks are generally more tax-efficient, as long as they are held for more than one year, so you can place those in your least tax-efficient accounts.

Investment Selection

Now that you know which accounts you will be using and your allocation of assets, it’s time to select your specific assets. Investment selection is probably the most written-about subject in finance, so I will be brief.

Options include a whole universe of individual stocks and bonds, mutual funds and ETF’s, and all-in-one target-date funds which are “funds of funds”. All of these include both passive and active strategies.

As a general rule, ETF’s tend to be more tax-efficient than mutual funds.

This content is developed from sources believed to be providing accurate information, and provided by Sequoia Financial, LLC. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Schad TenBroeck is an Investment Advisor Representative of Sequoia Financial, LLC. Investment Advisory Services are offered through Sequoia Financial, LLC, a California Registered Investment Advisor. Insurance services are offered through TenBroeck Insurance Services. Sequoia Financial, LLC and TenBroeck Insurance Services are affiliated.


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