Tax efficient placement is one of the most underrated tax...
The Money Cruncher, CPA@money_cruncher
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Nov 27, 2024
~2 min read
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Tax efficient placement is one of the most underrated tax strategies.
Here's how you should optimize your portfolio and save money on taxes:
Here's how you should optimize your portfolio and save money on taxes:
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Investors have many assets in multiple accounts.
- Tax advantaged (like Roth IRA)
- taxable accounts (brokerage)
- tax deferred (t401k)
- Tax advantaged (like Roth IRA)
- taxable accounts (brokerage)
- tax deferred (t401k)
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The tax code recognizes different sources of investment income which are taxed at different rates, or, are taxed at a later time (tax "deferred")
The goal is to put the right investments in the right accounts to maximize tax efficiency.
The goal is to put the right investments in the right accounts to maximize tax efficiency.
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Step 1. Take a look at all your holdings, across all your accounts.
I.e. - 401k - S&P 500
taxable - $VTI, REITS, and 10% in bonds
Roth IRA - $VTI
I.e. - 401k - S&P 500
taxable - $VTI, REITS, and 10% in bonds
Roth IRA - $VTI
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Step 2: Least efficient funds
For example, holding REITs in taxable account is bad. REITs are non-qualified dividends and you will pay ordinary tax rates.
Instead of putting REITs in taxable, start putting them in Roth/401k instead.
For example, holding REITs in taxable account is bad. REITs are non-qualified dividends and you will pay ordinary tax rates.
Instead of putting REITs in taxable, start putting them in Roth/401k instead.
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Bonds are also very inefficient in taxable account as you are paying taxes on the interest.
Shift bonds to tax advantaged accounts (specifically 401k).
Shift bonds to tax advantaged accounts (specifically 401k).
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Step 3: International stock funds
It is possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts.
This could allow you to move international stock funds to taxable brokerage.
It is possible to get tax credit for foreign taxes paid from international stock funds, but you lose this opportunity in tax-advantaged accounts.
This could allow you to move international stock funds to taxable brokerage.
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Step 4: High growth funds
If all else is equal, it is better to have the fund with the highest expected return in your Roth account.
Because Roth is tax free growth account and not subject to RMDs.
If all else is equal, it is better to have the fund with the highest expected return in your Roth account.
Because Roth is tax free growth account and not subject to RMDs.
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Step 5: Place tax efficient fund
Tax-efficient funds are fine in any account.
I personally like $VTI as a tax efficient fund.
Tax-efficient funds are fine in any account.
I personally like $VTI as a tax efficient fund.
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Understanding how each asset is taxed across all your investment accounts is crucial.
However, always keep your asset allocation in mind.
It’s not recommended to sell assets within a brokerage if you have a large gain. Instead, adjust your allocation using new contributions.
However, always keep your asset allocation in mind.
It’s not recommended to sell assets within a brokerage if you have a large gain. Instead, adjust your allocation using new contributions.
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