Blog Article

Please clarify tax-managed vs. tax-deferred

Jeremy Burger

By Jeremy Burger, Chief Executive Officer CFA®, CFP®
Published On 02/02/2009

I am not sure I understand the difference between your tax-managed portfolios and your tax-deferred portfolios. Does tax-advantaged just mean using index funds? I have an all-equity taxable portfolio at Vanguard that includes large, small, international, growth, value and REIT funds. I’ve got at least 20 years before I can even think of retiring.



This is a good question, which allows us to clarify something we might erroneously assume that everybody understands. And the answer isn’t complicated.

A tax-deferred account is one on which you do not have to pay income taxes until you take withdrawals. Common examples include variable annuities and traditional IRAs as well as traditional 401(k) and similar employee accounts. (Our tax-deferred recommendations also apply to Roth IRAs and Roth 401(k) accounts, which are different in that the owner won’t ever be asked to pay income or capital gain taxes).

A tax-managed account is one that doesn’t have any tax shelter. In these, capital gains and income are subject to taxation in the year they are received. Such an account can be held in single or joint ownership or owned by a trust or a business.

Our recommendations are different for these accounts because of the taxation issue.

In a taxable account (also referred to as tax-managed), we are concerned with the after-tax return, so we look for the most tax-efficient ways to achieve the portfolio goals. One example that relates to your situation is REIT funds. The returns from these funds come mostly in the form of taxable income distributions which do not benefit from the special tax treatment that applies to funds that invest in common stocks. As a result, REIT funds are not tax-efficient, and we don’t include them in taxable accounts.

On the other hand, REITs fit perfectly into tax-sheltered accounts. The income they generate is treated no differently from any other income or capital gains.

In taxable accounts, we may recommend municipal bond funds as well as taxable fixed-income funds. We don’t spell these out in our recommended portfolios because every person’s situation is different, including the effect of various state income tax laws.

Regarding index funds, we recommend them for both tax-sheltered and taxable accounts.

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Jeremy Burger

By Jeremy Burger, Chief Executive Officer CFA®, CFP®

As CEO, Jeremy directs Merriman’s overall strategic plan and is focused on ensuring we have the right talent and resources in place to help our clients LIVE FULLY and provide peace of mind throughout their financial lives. In addition, Jeremy is responsible for our inorganic growth effort which seeks to bring together likeminded firms across the western U.S. to better serve our clients.

Jeremy is a CERTIFIED FINANCIAL PLANNER™ professional and a Chartered Financial Analyst®. He is a graduate of Seattle Pacific University with a degree in business administration and a minor in economics. He is also a member of the CFA Institute and the CFA Society of Seattle.

Outside the office, Jeremy spends time with his wife and three daughters, enjoying the outdoors, traveling to new places and supporting those causes most important to them. Jeremy is committed to helping his community and has worked with the Seattle Pacific University mentorship program and actively supports a variety of local charities including the Fred Hutch Cancer Center and those focused on helping disadvantaged children.

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