Advanced Tax Planning: The Holy Grail of Investing

Mark Bourguignon
Ascend Wealth Management
(415) 569-7909

ADVANCED TAX PLANNING is an essential component of comprehensive wealth management. Yet, for many investors, taxes are often an afterthought because they feel the tax impact of their decisions are either:

1.) Too complex to understand,

2.) Insignificant to returns, or

3.) Just not interrelated because taxes aren’t paid when investments decisions are made.

This lack of awareness about taxes should hardly be surprising. After all, the investment industry markets performance exclusively on a pre-tax basis, thus creating no incentive for fund managers to consider the tax impact of their decisions. 

However, by looking beyond conventional wisdom and applying evidence-based strategies, investors can employ advanced tax planning to minimize taxes. And since investment returns should (of course) be calculated net of taxes, the result is higher annual returns.

These higher returns are achieved without incurring any additional risk and, in some cases, there are even opportunities to decrease your investment risk and other non-tax costs while even potentially increasing pretax returns. The compounding of these factors can make a substantial difference in the wealth you accumulate.

Because risk and return are inextricably linked, we refer to this ability to generate higher returns without assuming any additional risk as the "holy grail of investing"

This is not just our point-of-view. Several academic studies[1,2,3,4,5] have shown that advanced tax planning can improve after-tax returns by 1-2% (or more) annually. These tax savings are reliable and act as an almost immediate cash flow benefit to your wealth. 

This White Paper presents the following strategies designed to lower your taxes, and enhance your portfolio's growth, and ultimately protect your wealth:

  • Asset Location Optimization: How to identify the right account type for each asset type. 

  • Generating a Tax-Efficient Paycheck: How to generate low-tax income from your savings.

  • Withdrawal Hierarchy: How to tax-efficiently withdraw money in order to reduce the drawdown of your savings.


A well-planned investment strategy is one that is diversified among a broad set of investments (corporate and government bonds, domestic, international, and emerging market stocks, REITs, et al.) and utilizes multiple account types (e.g., tax-deferred, taxable, tax-free). Each of these investments and account types are subject to different tax rules. Asset location optimization is when an investor uses knowledge about the U.S. tax code and other data to match the appropriate investment with the appropriate type of account.

In order to execute this strategy appropriately, investors will need to make a continual set of calculations. This is because it is highly improbable that their desired asset allocation will match up perfectly with the funds available in each account. In addition, each account will be subject to ongoing capital in/outflows and occasional rebalancing in order to control risk exposure. For these reasons, location optimization requires a considerable amount of discipline and attention to detail, but the benefits—permanent tax savings that increase your wealth without incurring any additional risk—are definitely worth it. 

Conventional Approach: Account-level Investment Management

Most investors manage portfolios at the account level. This means that each account is managed separately without consideration of what’s in their other accounts. So, an investor with a 70%/30% (stock/bond) allocation will have similar (or the same) investments in each of their accounts, regardless of the type of account. 

Evidence-based Approach: Client-level Wealth Management

A more comprehensive wealth management approach seeks to place investments in the appropriate accounts based on tax rules. The general principles are:

1) Investments held primarily for long-term capital appreciation (e.g., stocks) should be held in taxable accounts in order to take advantage of lower capital gains tax rates and/or step-ups in basis at time of death,

2) Tax-inefficient investments (e.g., taxable bonds, REITs, hedge funds, real assets, etc.) generating ordinary income should be held in retirement accounts to avoid current taxation, and

3) Investments generating higher expected long-term returns (e.g., foreign investments, alternatives, etc.) should be held in tax-free (Roth) accounts since these returns will avoid taxes altogether. 

So, what are some advantages of asset location optimization?

  • Lower trading costs. Putting the same (or even similar) investments in multiple accounts is not only tax inefficient but also results in unnecessary trading costs. 

  • Lower estate taxes. Placing securities that generate long-term capital appreciation in your taxable accounts can greatly enhance the value of your estate. This is because these accounts are granted a one-time step-up in cost basis at the time of death, which means your heirs will avoid owing any taxes on the gain in those securities. Tax-deferred accounts do not receive the same benefit.

  • More control over timing of tax payments. A benefit of holding stocks in your taxable accounts is that you can exert much more control over the amount and timing of tax payments you incur. This is because you can choose when to sell stocks, whereas bond investors have no such control over the timing of interest payments and the resulting taxes owed. Thus, you may choose to take gains (and pay taxes) in a year when you have an offsetting loss elsewhere in your portfolio or in a year when your tax rate is actually lower. 

  • Higher returns. By prioritizing the placement of taxable bonds in tax-deferred accounts, investors typically meet all of their fixed income needs in that account alone and can avoid buying municipal bonds, which have a return "haircut", in their taxable accounts. The result is higher returns for your entire portfolio.


Generally, there are three main sources of investment returns: bond income, stock dividends and capital gains. Each of these sources of return can be used by an investor, most often a retiree, to generate a tax-efficient paycheck that can be used to supplement their annual living expenses.

Conventional Approach: Income Investing

Investors that want to generate income from their savings typically seek the comfort of bond income and stock dividends as their primary source of returns. Psychologically, this has been a preferred approach because income and dividends are known, although not guaranteed, at the time of purchase, whereas capital gains seem much less known. This strategy requires an investor to emphasize an increase in allocation to bonds, sometimes preferring higher yielding bonds and stocks that have high dividend yields. 

Evidence-based Approach: Total-Return Investing

All things being equal, income-seeking investors should be indifferent whether their returns come from interest, dividends or capital gains. Yet, when you consider the variables that matter a great deal in investing–taxes, risk, and return–an investor, especially retirees, should greatly prefer a total-return strategy that favors all sources of return, rather than prioritizing interest and dividends only. As evidence of this, consider these basic investment facts: 

1) Long-term capital gains incur much lower taxes than most interest income and some dividends, which makes capital gains a tax-efficient source of returns.

2) Broad diversification is the greatest panacea for risk, and so limiting your return sources to interest income and dividends exposes you to unnecessary risk. 

3) Stocks have higher long-term expected returns than bonds, which means favoring bonds may be limiting your earnings power. 

4) Bond exposure should be determined by risk tolerance and capacity, not by income requirements.

Because of these investment truisms, the values of total-return investing are clear. They include:

  • Lower taxes. When you sell a stock, taxes are only levied on the difference between the purchase price and sale price. Thus, the portion of the proceeds attributed to your initial purchase price is effectively tax-free income.

    • Also, long-term capital gains are taxed at rates nearly half of that imposed on the majority of interest income and certain (nonqualified) dividends.
  • Higher returns. There is no evidence that stocks with higher dividend yields generate greater returns than low (or no) yield stocks. In fact, small cap stocks have produced higher long-term returns and pay much lower dividends than large cap stocks[6] thus an investor prioritizing high dividend stocks may be sacrificing opportunities for higher returns among their investments.

  • Reduced loss of purchasing power. Relying solely on bond interest can create funding shortages. A $1mn portfolio of treasuries in 2007 could have generated $50k of safe income. At today’s rates, it would take a $2mn portfolio to generate that same amount of income. 

  • Lower investment risk. Prioritizing high dividend yield stocks and/or bonds can lead to poor diversification and unnecessary risk exposure.

    • Investors seeking high yield stocks in the early 2000s found themselves over-exposed to large banks and REITs just before the Great Recession. These stocks incurred much greater dividend cuts and stock losses than the broader markets. More recently, yield-seeking investors have targeted energy stocks, which have also been a rather poor relative investment.
    • Targeting higher yields among fixed income securities, where yields and risk are highly correlated, is even more dangerous. This is especially true for retirees who, generally, should be dialing back risk.


While investors spend much of their life consumed with how to properly save and invest their money, they often don’t pay enough attention to how to properly receive their money. Yet, the order in which you pull money from your various accounts can make a significant difference in how much money is available over your lifetime. Since retirees are often most worried about how long their money will last, it makes sense to follow a withdrawal strategy that is likely to maximize the longevity of your savings. 

Conventional Approach: The Common Rule

The most common way retirees pull money from their savings is to start with taxable accounts first since most of the distributions are taxed at favorable long-term capital gains tax rates. From there, retirees pull from tax-deferred accounts, which are subject to the investor’s marginal income tax rate. Finally, Roth IRAs are tapped last to preserve the tax-free growth (and distributions) of these accounts. 

Evidence-based Approach: The Informed Strategy

Here, again, it makes sense to take advantage of specific tax rules imposed on each type of account. Since distributions from tax-deferred accounts incur the highest possible taxes, it makes sense to take distributions from these accounts up to the level of your taxable deduction. This allows you to get money out of these accounts without paying any taxes. After that, taxable funds are used, followed by tax-free (Roth) distributions in order to keep taxes low. If additional distributions are needed, the tax-deferred accounts can be tapped again.

Further support for the Informed Strategy:

  • A 2012 study in the Journal of Financial Planning[3], analyzed 12 different combinations of taking withdrawals and concluded the conventional approach (the "common rule") was only the 6th most efficient strategy. The best strategy (the “informed strategy”) resulted in a 37% ($438k) higher ending balance (based on a $2mn beginning balance) after 30 years.    
  • Tax-deferred accounts are subject to required minimum distribution (RMD) rules once you turn 70.5 years old. If your tax-deferred account(s) become too large, then your RMDs could incur greater tax costs than those on long-term gains from taxable accounts. By taking distributions from tax-deferred accounts earlier, investors can lower the risk of RMDs becoming too large. 

There are a number of other tax-efficient strategies that should be utilized in a comprehensive wealth management plan. These include:

Tax Loss Harvesting
Loss harvesting is when an investor collects a tax credit by selling depreciated stocks in order to offset taxes (as a result of gains) elsewhere in the portfolio. These tax credits can be carried forward into future years. Also, by employing an asset class investment strategy (rather than conventional active management), you can more easily circumvent IRS wash sale rules and keep your assets 100% invested at all times. 

Tax Lot Identification
For many investors, the easiest way to sell shares is to utilize whatever standard accounting process is offered by their custodians. In many cases, however, a more disciplined tax lot methodology that analyzes all holdings will result in a lower tax liability.

Charitable Giving
Investors that are charitably inclined should donate highly appreciated securities instead of cash. This allows the investor to avoid capital gains taxes and receive the full benefit of their gift as an immediate tax deduction. 

Short-Term Gain Avoidance
Investors who incur short-term gains may end up nearly doubling their tax liability. Short-term gains are often incurred by stock pickers and market timers who ignore the tax impact of their decisions. Not only do these investors pay more in taxes, but evidence shows that these strategies typically result in subpar pre-tax performance as well. 

Tax-Efficient Investments
Utilizing asset class funds is far more tax efficient than using actively managed mutual funds. This is due to low turnover and fewer capital gains distributions. In addition to tax efficiency, these funds have also produced superior pre-tax returns. 

Family Gifting
Investors with large enough estates may consider taking advantage of the annual gift exclusion to transfer wealth without incurring any gift tax and to lower the size of their taxable estate.  


As a fiduciary, it is our obligation to do everything we can to maximize our client's wealth. In order to generate greater wealth, it is not enough to seek higher returns. A comprehensive wealth management plan pursues the highest possible returns at the lowest possible tax cost. These tax savings act as an almost immediate and risk-free cash flow benefit to your wealth.

By reinvesting these savings, investors can magnify the impact of what Albert Einstein once called "The greatest invention in human history... Compound Interest."

When it comes to tax planning, investors should not be too dogmatic about how they manage their wealth. Every individual situation is unique and requires knowledge and discipline in order to make the most of your money. Investors need to make sure that their plan syncs up with current tax rules and their personal situation and should seek the advice of trained experts in order to make the most of their personal situation.


Because we’re living longer, healthier, and more active lives, it is important to make smarter investment decisions now so your portfolio can provide for you as you age.

Due to the power of compounding, the difference between earning just 7% or 8% on $1mm over 30 years is an additional $2,450,400 of wealth. This increase in wealth can substantially enhance your life in retirement, the gift you provide to your heirs, or your philanthropic aspirations.

You owe it to yourself to make the smartest investment decisions possible.

We are here to help. Please contact Ascend Wealth Management to set-up a complimentary portfolio review and to hear how a sensible, evidence-based investment approach can provide you with greater prosperity and peace of mind.

About the Author
Mark Bourguignon is the Founder and President of Ascend Wealth Management. Previously, Mark was a Director at Clearbridge Investments, a Legg Mason Company, where he was a Fund Manager for the Clearbridge Small Cap Value Fund and a Senior Portfolio Analyst for the firms all cap value, balanced income, and small cap strategies. Prior to Clearbridge, Mark served as the Director of Research for Option Advantage Partners L.P., which was the first private equity fund to provide institutional funding to entrepreneurs who wanted to tax-efficiently exercise their stock options. Mark led the fund's research effort on behalf of the General Partner and its accredited investors. Mark began his career as an equity research analyst at the investment banking firms Donaldson, Lufkin and Jenrette and Thomas Weisel Partners. Mark earned a Bachelor of Science degree in Finance from Marquette University.

About Ascend Wealth Management
Ascend Wealth Management is an independent private wealth management firm that works with individuals and families. The firm provides the highest standard of care and ethics in the investment industry—a fiduciary standard—which means their advice always serves a single purpose: to build financial security and wealth for you and your family.

The firm works closely with its clients in order to understand their unique needs, goals and risk tolerance and then builds customized investment portfolios of institutional-class funds designed specifically for long-term investors who are seeking an alternative to what is commonly available among the investment industry. Their strategy is based on sound, time-tested principles that have been confirmed by Nobel Prize-winning research and decades of empirical evidence.

We welcome the opportunity to meet with you, conduct a thorough review of your current investment strategy, answer all of your questions, and discuss how a sensible, evidence-based investment approach can provide you with greater prosperity and peace of mind that comes from knowing that your money is being managed with expert care.

Contact Ascend Wealth Management for a complimentary portfolio review.

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[1]Jaconetti, C.M., CPA, CFP®, “Asset Location for Taxable Investors.” Vanguard Investment Counseling and Research; [2]Robert D Arnott, Andrew L Berkin and Jia Ye, “Loss Harvesting: What’s It Worth to the Taxable Investor?” Journal of Wealth Management; [3]A.R. Sumutka, A.M. Sumatka, L.W. Coopersmith, “Tax Efficient Withdrawal Planning Using a Comprehensive Tax Model", A 2012 study in the Journal of Financial Planning, [4] Du, Jianan Du, Qi, Yinsi, Thomas, Brandon, Zvingelis, Janis, "Capital Sigma: The Sum of the Various Sources of Advisor-Created Value", [5] Francis Kinniry, CFA, Colleen Jaconetti, CPA, CFP, Michael DiJoseph, CFA, Yan Zilbering, Donald Bennyhoff, CFA, "Putting A Value on Your Value: Quantifying Vanguard Advisor's Alpha", [6]Currently, small cap stocks (measured by the Russell 2000) yield 1.4% vs. large cap stocks (measured by the Russell 1000) yield of 1.9%.

For more information, please email Mark Bourguignon at or call (415) 569-7909.
Ascend Wealth Management Inc. is a Registered Investment Adviser. We serve as an independent, fee-only wealth management firm for individuals, families and institutions to help them achieve their investment goals. To learn more about us and our services, please visit Ascend Wealth Management or email us.
This newsletter is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Ascend Wealth Management Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Ascend Wealth Management Inc. unless a client service agreement is in place.