Financial Advice Q&A

Posts: 4
Should my taxable portfolio be invested differently than my IRA?
[ Edited ]

My question is about the investing approach to a portfolio that is taxable vs a portfolio that is tax sheltered by being within an IRA. That said, I have noticed that my tax sheltered account (with 7 investments) has 3 (3 of 3) same investments in my taxable account. It was my belief that when taxes are considered, investment portfolios will have a different makeup. Have I over simplified my belief?

Posted: 2014-03-14 08:52 AM
Other Answers: 1
Community Manager
Posts: 1,009

I’m guessing you must be using managed accounts where either USAA or another firm is picking and managing your investments for you in exchange for a fee. Correct? If so, it sounds like your general understanding is on target but you might have oversimplified things just a bit.  Here’s what I mean.


Portfolio First, Taxes Second
Managed accounts tend to follow one of my favorite sayings as it relates to taxes and investments: Never let the tax tail wag the investment dog. Said differently, even when you’re trying to be tax efficient with a portfolio, the investment mix tends to come first. Then strategies to try to be tax-efficient are woven throughout. If tax-efficiency came first, it would be difficult in many cases to drive sufficient long-term returns, especially in portfolios that are growth-oriented.  In light of this, it’s not uncommon for an IRA investment portfolio to hold many of the same investments as a taxable portfolio.


Common Techniques
Even so, there are some differences you’ll typically see between taxable and tax-deferred accounts.  For instance, in the fixed income portion of a taxable account allocation, you’ll often see municipal bonds used instead of taxable bonds.  Also, if the account size is large enough and the management style sophisticated enough, you could even see the use of individual stocks and bonds or exchange traded funds in taxable accounts. These would be in place of actively managed mutual funds which don’t offer as much control over income taxes. Finally, in some situations it could also be a good idea to hold more of your capital gain producing assets in taxable accounts while allocating your ordinary income producing assets (like taxable bonds) to tax-deferred accounts. It all depends on how sophisticated you want your investment approach to be and what’s appropriate for your situation.


Ask Questions
To know for sure what’s happening in your accounts you’ll want to ask whoever is managing them. Rest assured though, it’s a very valid question because there are many ways to manage investment portfolios. Ultimately, you should understand how your accounts are being managed and why.


Thanks so much for your question.  I hope this helps and I wish you all the best!



Posted: 2014-03-17 08:35 AM


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