What goes where? Which investments belong in a client’s taxable account, IRA, etc.?

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What goes where? Which investments belong in a client’s taxable account, IRA, etc.?

Thoughtful consideration to asset allocation and investment placement will help your client maximize the long-term benefits of having you by their side.

As we all know, asset allocation is critical when trying to protect clients during market downturns and helping them feel confident. But, what’s also important is making sure the investments are thoughtfully placed in an after-tax, pre-tax or tax-deferred account.

Some things to consider:

  • Is the client in a low tax bracket due to unused itemized deductions and personal exemptions?
  • Are they subject to the Alternative Minimum Tax (AMT)?
  • Do they plan on working during retirement?
  • Do they need current cash flow?
  • Do they have a substantial capital loss carryforward?

These, and many other questions, play into the placement of investment selections to accommodate the overall asset allocation. During the accumulation phase, when clients are subject to the highest tax bracket they’ll ever face, it might be a good idea to allocate a sizable portion for their portfolio into tax free bonds. Doing so will not only reduce their overall tax bill, but also provide an income source once they retire. Conversely, investing retirement plan assets in growth/aggressive growth not only saves them current income and capital gains taxes, but also helps them focus on the long-term nature of equity investing, which may take their mind off the short-term gyrations in the markets.

If a client has a large capital loss carryforward, investing in aggressive growth investments in post-tax accounts could create a “tax-free” advantage to equity investing. Again, using the client’s overall asset allocation as a guidepost, the investment professional can properly place the investment.

Keep in mind, with all of this year’s volatility, buying equity mutual funds toward year-end could sock a client with huge capital gains distributions even though they weren’t shareholders for the gains!

Take the time to ask the client’s CPA for copies of tax returns, especially the K-1s. (Please note, your client must call the CPA to authorize them to send you the return.) Are the distributive items coming in the form of ordinary income, capital gains, preference items, etc.?

The investment selections you make could greatly improve the overall tax picture. Remember, you are not alone! The client’s CPA is always willing to assist you and they’re typically very impressed that you even asked in the first place. (This never hurts from a referral standpoint.)

If you’re planning to convert all, or a portion, of an IRA to a Roth, consider the investment category of the holdings to be sure it properly fits the tax-free nature of the account. That is, if you’re recommending small-cap and/or mid-cap investments with higher turnovers, think about putting them in a Roth IRA where the short-term gains and investment income will never be taxed.

In summary, asset allocation is very important, but so, too, is investment placement. Thoughtful consideration to both will help the client maximize the long-term benefits of having you by their side. 

Charles L. Nemes, CFP®, is Senior Vice President, Investments at Nemes-Rush Private Wealth Management of Raymond James in Novi, Michigan.

CFP® | Certified Financial Planner™ |
Certified Financial Planner Board of Standards, Inc., owns the certification marks above, which it awards to individuals who successfully complete initial and ongoing certification requirements.



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