CASE STUDY
Tax Allocation – An Investment Strategy
Most individuals use the same investment strategy (pro-rata), ignoring how the accounts are taxed.
Problem
Minimize taxes and maximize wealth
Solution
Match investment types with each account type for the highest tax efficiency.
- Taxed – Annually
- Inv. – Value Equities
- Strategy – Lower capital gains tax rate as well as potentially eliminate the tax with tax loss harvesting.
- Taxed – On withdrawal at the ordinary tax rate.
- Inv. – Taxable Bonds
- Strategy – interest on bonds is taxable at ordinary rates. Rates are the same and it allows you to postpone the tax.
- Taxed – TaxFree.
- Inv. – Growth Equities
- Strategy – Over time these investments historically have had the highest gains. Match with a tax-free account and eliminate the tax.
Benefit
Implementing this strategy of minimizing taxes can create wealth over time. It is not what you earn but what you keep that makes a difference!
