"One thing that no all-in-one investment product does well is manage taxes. Almost everything…"

Tuesday, January 17th, 2012 at 3:36 pm

“One thing that no all-in-one investment product does well is manage taxes. Almost everything complicated about investing comes down to taxes. We have all these different accounts (401(k), Roth IRA, 529 college savings plan, taxable brokerage account) that are taxed in different ways.

To make matters worse, different investments are taxed differently. Interest on bonds is taxable at your ordinary income rate. Most stock dividends are taxed at a lower rate. Then there’s short-term and long-term capital gains rates, which range from zero to 35%, depending on… Oh, let’s not get into it.

What this means, in short, is that if you have a mix of taxable and tax-advantaged investment accounts, like a 401(k) plus a regular brokerage account, it’s a bad idea to reproduce the same portfolio in both places. You’ll pay more tax than necessary. Automated services like Wealthfront or target-date funds don’t take this into account. They can build you a nice diversified portfolio, but if it doesn’t consider your tax situation, it’s not the best portfolio for you.

Traditional financial advisors are good at playing this tax game.”

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