money matters
TIMELESS TIPS ON
Tax-Wise Investing
Part II: You and Your Tax-Wise Team
by John Garvey, Jr., CPA/PFS
In Part I of our series on Tax-Wise Investing, “You and Your Investments,” we explored how to engage
in year-round tax-wise investing by adopting your own best practices as well as by favoring fund managers who are likewise keeping a tax-efficient eye on their offerings. There are two other important
areas to tend to as part of your due diligence: your investment portfolio’s tax-efficient management
and your advisers’ tax-efficient teamwork.
Proper Portfolio Management:
The Art of Asset Location
Beyond tax-wise management of the individual funds in which
you’re invested, some categories of investments are inherently
more tax-efficient than others. For example, stock funds are usually
more tax-efficient than bond funds (with many caveats that we
won’t go into here). A plain vanilla U.S. stock fund tends to be more
tax-efficient than funds seeking to capture the expected premium
returns from smaller, less liquid markets. And so on.
This means that another vital way to manage your taxable income
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is to practice wise asset location, which is a fancy way of saying that
you should place the least tax-efficient funds within your taxsheltered retirement accounts, where the inefficiencies are more
effectively rendered moot. The reverse is true for your most taxefficient holdings. You want to keep them out of your tax-sheltered
accounts, where their tax-efficient advantages are often lost.
The concept is simple enough, but implementation can be tricky.
First, there is only so much room in your tax-sheltered accounts.
Challenging trade-offs must be made to ensure you’re making best
use of your available tax-sheltered “space.” Effective asset location
also involves considering other tax-planning needs, such as the