Managing Multiple Accounts - a Taxing Endeavor

At JMS Capital Group Wealth Services, many of our clients have multiple accounts.  Our bulging file cabinets attest to this fact while making a mockery of the idea of the paperless office.  Between 401(k)s, IRAs, and investment accounts—not to mention trust accounts, real estate, and other financial arrangements—we are blessed indeed that our greatest joy in life, along with sarcasm, is filing. 

So, we keep track of a lot of accounts for our clients.  And for many advisors, the simplest way to manage multiple accounts is to manage each one the same way.  It’s an easy way to do business.  It’s an easy way for clients to keep track of their portfolios.    When a client review comes up, there are no pesky questions about why one account is performing better than another.  And it could be a reasonable practice on behalf of the client if the IRS treats different types of accounts in the same way.  But, of course, if the IRS treats different types of accounts in the same way, then they wouldn’t really be that different, would they? 

Rather than waste time chewing this philosophical nugget, we’ll simply note that the tax treatments for traditional IRAs, Roth IRAs, and other investment accounts are very different.  It’s our job to know this, and to take taxes into account, when possible, to optimize your portfolio.    Specifically, it is usually best to emphasize bonds (or other income‐generating assets) within a traditional IRA, equities within a taxable investment account, and higher return (and likely higher risk) investments within a Roth IRA. 

Why?   Assets and any ensuing gains that are held within a traditional IRA will ultimately be taxed at ordinary income tax rates.  This is true even if the IRA is passed down to heirs in the form of a beneficiary IRA.  Gains from an investment account, however, are taxed at capital gains rates, which for most people are significantly less than ordinary income tax rates.  Finally, because gains within a Roth IRA are not taxed at all, it makes sense to insert higher risk/higher reward investments within it—both because its expected higher returns are not taxed, and because a Roth IRA is typically the last source of income to be tapped, so that it has more time to ride out and overcome any downturns. 

We’ll pause here and note that while we are prescribing good rules for tax efficient portfolio management, we acknowledge that every client’s situation is different; this is why we take the time to try and conduct frequent reviews with you.  Moreover, since we do get asked occasionally about robo‐advisors, we will observe that they are typically unable to provide the tax optimization strategies that we can implement.  So while we acknowledge that we fully expect to welcome our robot overlords sometime in the future, that time is not now.  Robo‐advisors have the advantage of being cheap, but to a significant extent, you only get what you pay for. 

— JMS Team

Disclosure:
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument or investment strategy. Certain material in this work is proprietary to and copyrighted by Peak Advisor Alliance and is used by JMS Capital Group Wealth Services LLC with permission. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting and legal or tax advice. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.