Strategies to Minimize Taxes: Tax Efficient Asset Allocation

Some general advantages with owning taxable bonds in a qualified account over holding municipal bonds in a taxable account are as follows:

• Less risk of negative impact due to tax law changes
• No AMT exposure
• No geographic risk
• Better credit quality control
• Better liquidity
• Lower transaction costs

During the non-IRA withdrawal stage the taxable bonds will generally produce higher pre-tax returns. During the withdrawal phase of IRA assets, municipals may provide a slight after-tax advantage, but probably no more than .1% to .5% annually.

Equities Placement

Accumulation Phase
Taxable Account
98%+ tax efficient return (estimate)

Tax Deferred
100% tax efficient return

Withdrawal Phase
Taxable Account

• Gain is taxed at maximum 15% federal and your state rate
• May select tax lots - capital is not taxed
• Tax-loss harvesting is available
• Step up on basis at death

Tax Deferred

• Withdrawal taxed at maximum marginal state/federal rates
• No tax lot selection
• No tax-loss harvesting
• No step-up at death

Conclusion
Astute asset class placement between accounts, utilizing tax loss harvesting, and employing tax-managed index funds can provide the optimal benefits of tax-efficiency with maximum effective diversification. The rigorous application of these powerful tax-minimization techniques can help an investor retain more of their hard-earned wealth and be able to have more spendable income.