The new math to get tax alpha for clients

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Taxes and inflation are two risks your clients worry about if they are nearing or in retirement. Why? Because there are few retired mulligans. Once retired, there is no going back.

I wrote recently about ways to help your clients weather inflation. I want to rotate the other head of this pension hydra: taxes.

For many advisors, striving for tax efficiency in client portfolios begins and ends with reaping tax losses. This is certainly a valid practice in wealth management. But it’s not enough by himself maximize wealth in the accumulation phase and in the decumulation of retirement assets.

The value of the tax harvest peaks when markets fall and investors take losses or when they hold portfolios of high-turnover assets that make lots of gains. Opportunities to reap losses depend on an investor making new contributions to a stock portfolio with an inventory of large unrealized gains.

My research over decades has led me to conclude that five essential practices can provide “fiscal alpha” to investors. Each practice is necessary, but their true power is unleashed when combined and coordinated across multiple accounts and holdings.

Let’s take a look at each tax-alpha engine and when you can push it to the bottom for your customers.


1. Tax-smart location of assets
Placing the best holdings in the best account records taking taxes into account reduces the tax burden on portfolios and results in faster accumulation of wealth. Period. My colleague Jack Sharry wrote about asset location last month.

It would be helpful if you had asset tracking software that looks at all the accounts in a household portfolio and measures and scores its overall tax efficiency. Then the software can suggest specific transactions in order to maximize after-tax value.

Asset location can play a surprising role in reducing taxes on withdrawals from Individual Retirement Accounts (IRAs) in retirement when an investor holds low-yielding assets in traditional IRAs and high-yielding assets in traditional IRAs. Roth IRA.

My research and experiments show that tax-smart asset location has the biggest impact on the money available for retirement spending.

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