The Role Of Tax Efficiency In Retirement Planning

As you approach or enter retirement, most investors focus on how their money is invested. While choosing the right mix of stocks, bonds, and cash is important, where those investments are held can be just as valuable. This concept, known as asset location, is a powerful way to increase tax-efficiency in one’s overall investment portfolio without increasing investment risk.

Asset location involves placing investments into the account types where they are generally the most tax-efficient. Many retirees own assets across taxable brokerage accounts, traditional IRAs or 401(k)s, and Roth IRAs. Although these accounts may hold similar investments, each has different tax rules that can affect how much of your retirement savings you ultimately keep.

For example, investments that generate ordinary income, similar to taxable bonds or certain income-producing funds, are often better suited for tax-deferred accounts like traditional IRAs. Because taxes are generally deferred until distributions are taken, the annual tax impact of interest income may be reduced. Conversely, investments with greater long-term growth potential may be well suited for Roth accounts, where qualified withdrawals are generally tax-free. Tax-efficient investments, such as ETFs, tend to generate fewer taxable distributions, are often appropriate for taxable brokerage accounts.

Thoughtful asset location can also provide greater flexibility when taking retirement withdrawals. Instead of drawing exclusively from one account, retirees may benefit from coordinating withdrawals among taxable, tax-deferred, and Roth accounts. This strategy may help manage taxable income from year to year, potentially reducing taxes on Social Security benefits, limiting Medicare premium surcharges, or helping retirees remain in a lower tax bracket overall. Every situation is unique, but having multiple account types can create valuable planning opportunities.

It's important to remember that asset location should complement and not replace your overall investment strategy. Your portfolio should first reflect your financial goals, risk tolerance, and income needs. Once an appropriate investment allocation is established, asset location can help improve tax efficiency while maintaining that same risk profile.

Tax laws and personal circumstances change over time, making periodic reviews essential. Retirement, Required Minimum Distributions (RMDs), charitable giving, Roth conversions, and changes in income can all create opportunities to revisit how investments are positioned across account types.

While no strategy can eliminate taxes entirely, asset location is one of the few planning techniques that has the potential to improve after-tax outcomes without changing the underlying investments. By carefully considering not only what you own, but where you own it, you may be able to make your retirement savings work more efficiently and help your assets last longer throughout retirement.

As always, asset location decisions should be evaluated alongside your broader financial and tax plan. Working with a qualified financial and tax professional can help ensure your investment accounts are positioned to support your long-term retirement goals while adapting to changes in tax laws as well as your personal circumstances.

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This document is for educational and informational purposes only and does not constitute an advertisement or solicitation of any securities or investment services provided Mainstay Capital Management, LLC (“MCM”). This document should not be construed as investment, tax, or legal advice, or a solicitation, or a recommendation to engage in any specific strategy. MCM is an independent investment adviser registered with U.S. Securities and Exchange Commission. MCM specializes in workplace savings plan portfolio management and retirement planning advice for active employees and retirees. This document was prepared by MCM primarily based on data collected and analyzed by MCM. The opinions expressed herein are those of MCM alone and are for background purposes only. MCM does not purport the analysis to be full or complete or to constitute investment advice and should not be relied on. In addition, certain information contained herein or utilized to draw the conclusions contained herein has been provided by, or obtained from, third party sources. While MCM believes that such sources are reliable, it cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete. All materials and information are provided “as is” without any express or implied warranties by MCM. MCM charges its fee based on a percentage of assets under management, which creates an incentive and conflict of interest to increase assets in that account. Furthermore, MCM has two different fee schedules, and therefore has a conflict of interest when assets or accounts move from the lower fee schedule to the higher fee schedule. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Consult your financial professional before making any investment decision. Please see MCM’s Form ADV Part 2A and Form CRS for additional information.