What is Tax-Coordinated Portfolio™?

Tax-Coordinated Portfolio™ optimizes and automates a strategy called asset location. It starts by placing your assets that will be taxed highly in your IRAs, which have big tax breaks. Then, it places your lower-taxed assets in your taxable accounts. In doing so, you can rest assured that your portfolio is performing safely and optimally.

Research gathered from Betterment shows that this strategy can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years.

Here’s what an asset allocation with 70% stocks and 30% bonds looks like, held separately in three accounts. The circles represent various asset classes, and the bar represents the allocation for all the accounts combined.

Portfolio Managed Separately in Each Account

Portfolio Asset Allocation By AccountBut as long as all the accounts add up to the portfolio amount that we want, each individual account on its own does not have to have that portfolio. Asset location takes advantage of this. Each asset can go in the account where it makes the most sense, from a tax perspective. As long as we still have the same portfolio when we add up the accounts, we can increase after-tax return, without taking on more risk.

Here’s a simple animation solely for illustrative purposes:

Portfolio Asset Classes

Here is the same overall portfolio, except TCP has redistributed the assets unevenly, to reduce taxes. Note that the aggregate allocation is still 70/30.

Same Portfolio Overall—with Asset Location

Portfolio Asset LocationsThe concept of asset location is not new. Financial advisors, investment advisors, and even sophisticated do-it-yourself investors have been implementing some version of this strategy for years. But squeezing it for maximum benefit is very mathematically complex. It means making necessary adjustments along the way, especially after making deposits to any of the accounts.

For an optimal asset location strategy, an automated approach works best. Our investment software handles all of the complexity in a way that a manual approach just can’t match. Utilizing Betterment, one of our technology partners, allows us the ability to offer this automated investment service to all of our clients.

Frequently Asked Questions

How do I set up a Tax-Coordinated Portfolio?

Log in to your iInvest® account. Click the ellipses to the right of any account on the Summary page, and select “Set up a Tax-Coordinated Portfolio.” If you have multiple options, you may have to scroll down in this section. Follow the on-screen prompts to complete setup.

What should I consider before setting this up?

Asset location is a long-term strategy. While it may lower taxes in the short-term, the greater benefits typically come from a longer investment period. It is not appropriate for investors who are in a Federal tax bracket of 15% or lower. There may be other considerations, depending on your personal circumstances. Please see the full disclosure or contact one of our investment advisors for details.

Can I still withdraw money once I’ve set up my portfolio?

Yes. Asset location will not affect your ability to withdraw money. Note that long-term investors typically benefit the most from asset allocation and frequently withdrawing your money or making allocation changes may limit the benefits of this strategy.

Does Tax-Coordinated Portfolio affect my external accounts?

Having a Tax-Coordinated Portfolio™ at iInvest® does not affect your external accounts. For these funds to benefit from our automated asset location, you would need to roll over or transfer them to iInvest®.

Should I roll over my non-iInvest® IRA or old 401(k) before setting up my Tax-Coordinated Portfolio?

Yes, generally it’s more tax-efficient to roll over first and then funding your taxable account. This is because we can make larger rebalances in your IRAs (as compared to your taxable accounts) without causing you taxes.

Can I change the allocation of my Tax-Coordinated Portfolio?

You can change it at any time by going to the Advice tab. As always, changing your allocation can trigger taxable events, so you should avoid changing it unless your investment objective has changed, or an iInvest®TacticalSHIFT™ alert has been issued. When and If you do change your allocation, our Tax Impact Preview feature will show you a real-time tax estimate before you confirm an allocation change.

If you decide you no longer want these accounts coordinated, email us or schedule a meeting with one of our investment advisors and we’ll be happy to answer your questions.