Taxable Accounts

Other Common Names: Brokerage, Trust, Joint Tenant, Tenants in Common, UTMA/UGMA, Corporate, Estate

Taxability: Bank, CD, and corporate bond Interest is subject to state and federal income tax at ordinary income rates. Treasury bond interest is subject to federal income tax at ordinary income rates. Municipal bond interest is subject to state income tax (unless the bonds are issued by a municipality in the client’s state of residence) at ordinary income rates. Most dividends (qualified) are taxed at lower capital gains rates. Net short-term capital gains are taxed at ordinary income rates. Net long-term capital gains are taxed at capital gains rates.

Portfolio Tilt

In taxable accounts, we prefer stocks with strong growth prospects that typically pay lower dividends. This allows us to avoid unnecessary portfolio income while benefiting from the reduced tax rate on capital gains. We often invest in more treasuries, which are exempt from state income tax. Clients in high tax brackets will often see municipal bonds in these accounts.

We try to aggressively “harvest” tax losses in these accounts when they occur. Realized tax losses can offset gains in the current year and offset up to $ 3,000 in income, while any excess losses can be carried forward to offset future gains or income. We also strive to avoid incurring unnecessary capital gains in these accounts.

Traditional Retirement Accounts

Other Common Names: Traditional IRA, Rollover IRA, Beneficiary IRA, 401(k), SEP, SIMPLE

Taxability: You receive a tax deduction when you make contributions. Contributions grow tax-free. Distributions are subject to ordinary income tax. Distributions prior to age 59 ½ are typically subject to penalties.

Portfolio Tilt

For clients who also have taxable or Roth accounts, we utilize traditional retirement accounts to shield portfolio income from taxation. Consequently, we steer these portfolios toward stocks that pay higher dividends and corporate bonds. We generally underweight low dividend-paying stocks, municipal bonds, and treasuries. If we have a position that needs to be pared back and a client owns the same security in both their taxable account and a retirement account, we often sell part of the position in their IRA to avoid capital gains tax.

Roth Retirement Accounts

Other Common Names: Roth IRA, Beneficiary Roth IRA, Roth 401(k)

Taxability: You do not receive a tax deduction when you contribute. Contributions grow tax-free. Distributions after age 59 ½ are tax-free. Distributions prior to age 59 ½ may be subject to penalties.

Portfolio Tilt

In these accounts, we try to strike a balance between growth and income by selecting dividend-paying stocks that we believe have strong growth prospects. We will favor corporate bonds over treasuries and municipals. Our strategy with Roth accounts varies based on the exact mix of account types each client has.

Please note that the taxability descriptions above are simplified and incomplete. These abbreviated descriptions should not be used as tax advice. Please contact us or a CPA if you have tax questions.