Strategies To Minimize Taxes: Tax Efficient Asset Allocation

Accountancy Resources

Strategies To Minimize Taxes: Tax Efficient Asset Allocation



Tax Author: Admin

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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.


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