Tax-Efficient Investing

Core Concepts

Asset Location

Place tax-inefficient assets in tax-advantaged accounts and tax-efficient assets in taxable accounts:

• Tax-deferred accounts (Traditional IRA, 401k): Bonds, REITs, high-turnover funds, TIPS — assets generating ordinary income
• Tax-exempt accounts (Roth IRA, Roth 401k): Highest expected growth assets — all growth is permanently tax-free
• Taxable accounts: Index equity funds (low turnover, qualified dividends, tax-loss harvesting eligible), municipal bonds, tax-managed funds

The benefit of asset location increases with the spread between ordinary income tax rates and capital gains rates, and with the size of the tax-advantaged accounts relative to total portfolio.

Tax-Loss Harvesting (TLH)

Realize investment losses to offset capital gains, reducing current tax liability while maintaining market exposure: