Creating a More Tax Efficient Portfolio

Here are some simple tips to create a more tax efficient portfolio:

Invest in Index Funds

Index funds generate lower short-term capital gains and higher long-term capital gains due to much less frequent buying and selling.  Short-term gains are taxed every year as ordinary income.  Long-term gains are taxed at lower capital gains rates, and most are only realized when you sell your shares.

The idea here is to place assets that produce higher income (e.g. bonds) in tax advantaged investments (IRA, 401k) that will allow you to not to have to pay taxes annually on the income.

Then putting assets that generally produce less income (e.g. stocks) in taxable accounts.  You will have lower taxes each year, and when you sell your shares you will pay the lower long-term capital gains rate on your profits.

What about Roth IRAs and Roth 401k Accounts?

Since any gains in these accounts are tax free when withdrawn, it does make sense to put assets that will have the highest long-term growth in these accounts as well (e.g. stocks) as an exception to the rule above.


It will often not be possible to execute this perfectly with all of your income producing assets neatly tucked away in your Traditional IRA and your growth assets in your Roth IRA and taxable accounts.

Also please do not let the desire for tax efficiency overwhelm having the right asset allocation for your long-term needs.  Tax efficiency is really a tactic not a strategy.


New 401k Plan Disclosure Fees – An Eye Opener for Small Business

May 21st, 2012

After many delays, 401k plan providers and advisers will finally have to begin disclosing their fees. Some of these fees may come as a shock to some employers who were told that their plans were “free.”

Providers will have to disclose what the administrative fees are for the plan even if they are bundled into the mutual fund expenses in the plan. Mutual fund fee will have to be disclosed to participants in terms of the annual cost per $1000 invested.

Many participants will be surprised to discover that they are paying 2-3% of their 401k plan balance in annual fees. High fee plans are often sold to small businesses that lack easy access to lower cost 401k plan solutions, and lack the expertise to decipher the hidden costs in a supposedly “free” plan.

Hopefully the new disclosures will serve as a wake up call for small business and get them to ask some tough questions to their plan providers. Read the article for more details.