Challenging the Status Quo
Gil Baumgarten
Founder & CEO of Segment Wealth Management, Fiduciary Financial Advisor, Best-Selling Author of FOOLISH
We get puzzled looks from new clients when we explain our position on taxable fixed income (bonds) in IRAs. Traditional planning advice recommends placing your highest growth assets in an IRA to maximize the tax deferral. We usually recommend the complete opposite approach, which becomes more and more preferable the higher the income of the current or future retiree.
We prefer to aggregate investor bond exposure in IRAs since taxable bonds produce income that incurs the most punitive form of tax, ordinary income. Holding taxable bonds in personal or joint accounts would only spread the contagion of high-tax items. We prefer to align all forms of punitive tax under a single umbrella: the IRA.
The genesis of the problem here is that traditional advice pre-supposes the active management of stocks
This disparity between my advice and traditional advice can often be traced to advisor compensation
Better outcomes become more repeatable by eliminating friction points. Tax management
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Now, let’s take optimization a step further. Customized indexing gives investors access to their biggest gainers as a funding mechanism for their favorite charities or donor-advised fund. This is why, despite the tax efficiencies of ETFs, they are not the pinnacle. The deconstructed index is the pinnacle, where you can manage the taxes of each position’s tax lot, mining for benefits in both gains and losses. Done properly, investors could lower their capital gains exposure while simultaneously generating a full tax deduction for the gift of their most concentrated gains. Some gifts can thus be made with 40-cent dollars. High net worth investors can stack these fee/tax/deferral/giving benefits and run circles around the occasionally hot mutual fund whose performance is fleeting, whose higher costs repeat, and whose tax drag reduces compounded return and sacrifices the powerful step-up rule.
You can read about these and other anti-mainstream topics in my Amazon best-seller called?FOOLISH: How Investors Get Worked Up and Worked Over By the System. Also available on Audible.
Please see?IMPORTANT DISCLOSURE?information.