There are many aspects of wealth management we cannot control. Tax codes evolve. Global events come and go. The markets will go up and down. By carefully minimizing taxes due, we can exert an important degree of control over maximizing end returns – the kind you get to keep as your own.

It starts with our annual tax packets. Each year, we aggregate our clients’ Form 1099s from Schwab, and deliver them to their tax professionals for timely and efficient tax-filing.

That’s just one small thing. We are working all year round to help our clients keep a lid on their taxes due. Below are additional examples:

• Asset Location: Locating the most tax-efficient holdings in taxable accounts, and the least tax-efficient holdings in tax-deferred or tax-free accounts, to minimize a portfolio’s overall taxes due.
• Tax-Loss Harvesting: Acting on opportunities to reduce taxes through tax-loss harvesting when appropriate.
• Tax-Managed Funds: In taxable accounts, using tax-managed funds whenever possible, to reduce the capital gains and dividends that fund managers must pass on to shareholders.
• Tax-Favored Accounts: Helping clients establish tax-favored IRAs, 529 plan accounts, Healthcare Savings Accounts (HSAs) and similar accounts as appropriate.
• Charitable Giving: Helping clients shift their tax-wise charitable giving plans following the Tax Cuts and Jobs Act of 2017. For example, implementing Donor Advised Funds and Qualified Charitable Distributions when appropriate.
• Estate Planning: Collaborating with clients’ estate planning and insurance professionals to consider advanced planning strategies for minimizing and covering taxes due upon estate transfer.

So, this spring – or any time of year – let us know if you’d like to explore how you might increase your overall wealth by decreasing your taxes due.

Here’s another idea to consider as you embark on a fresh start in 2017: In financial jargon, what you own is sometimes referred to as asset allocation. But what about where you own what you own? That’s called asset location. It’s about deciding whether to locate your stocks, bonds and other holdings in your taxable or tax-sheltered accounts, so we can maximize your portfolio’s overall tax efficiency.

Unfortunately, compared to asset allocation, asset location is less familiar to most investors. That’s too bad, because a little bit can go a long way toward minimizing some of the sticker shock you experience when your Form 1099s start rolling in, revealing your annual taxable capital gains and interest earnings.

How far can it take you? In this related Illustration of the Month, Nerd’s Eye View’s Michael Kitces estimates it can bring you up to 0.75% of economic impact to your bottom line.

How Does Asset Location Work?

The general rule of thumb is to:

• Place your least tax-efficient holdings in your tax-sheltered accounts, where you aren’t taxed annually on the capital gains or interest earned. Think bonds, real estate and tax-inefficient equities such as emerging markets.
• Place your most tax-efficient holdings in your taxable accounts – such as the rest of your stock holdings.
• In your taxable accounts, invest in low-cost evidence-based funds that are deliberately managed for additional tax efficiencies. (Start by looking for “tax managed” in their fund names and prospectuses.)

Advisor to Assist

It makes intuitive sense that, by locating your most heavily taxed investments within your tax-sheltered accounts, you can minimize or even eliminate their tax inefficiencies as described. But it’s not as easily implemented as you might think.

First, there is only so much room within your tax-sheltered accounts. After all, if there were unlimited opportunity to tax-shelter your money, we’d simply move everything there and be done with it. In reality, challenging trade-offs must be made to ensure you’re making best use of your tax-sheltered “space.”

Second, it’s not just about tax-sheltering your assets; it’s about doing so within the larger context of how and when you need those assets available for achieving your personal goals. Arriving at – and maintaining – the best formula for you and your unique circumstances involves many moving parts with judgment calls and tradeoffs to consider, and evolving tax codes to remain abreast of.

Ready To Get Located?

It’s common for your assets to wander far and wide over the years, as you accumulate regular accounts, retirement plan accounts and financial service providers galore. Proper asset location often gets lost in the shuffle, and can result in your paying more than you need to on your income taxes. If you’ve not yet built asset location into your investing, consider this tax season to be a great time to take a closer look at how to put asset location to work for you and your wealth.

For the final post in our tax management series, we’ll take a look at asset location. Everybody knows the three rules of real estate, but most don’t know that the same rule also applies to investment portfolio construction.

Asset location is the practice of positioning tax-inefficient assets in tax-advantaged accounts. For example, fixed income and REITs should first be held in tax-deferred accounts like an IRA, 401(k), or 403(b) while tax-free municipal bonds and equities should be positioned in taxable accounts.

A recent study by Vanguard estimated that professional advisors can add up to .75% annually to investment returns by utilizing proper asset location in client accounts. It is all too frequent that we find new clients coming on board with poor use of asset location, but with a few simple tweaks we can align your investments to maximize your after-tax return.