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General Finance Question – Tax Liability

Q: What do you think about UTMA accounts? My kids have them and the use the dividend income for private school costs. We are currently contributing $1200-$1500 per month in various accounts. I have nearly $2,000,000 in investments allocated across various funds. My tax bracket is 31% – 33%. How can I become more tax efficient?

A: We like UTMA accounts as a compliment to a 529-based college savings plan.  At this point, it sounds like your accounts are rather well funded for most schools that your children would attend, so congratulations on that.

As for the allocations, I cannot comment on the mix without knowing more details including risk tolerance, allocation, etc. 

To increase tax efficiency in your portfolio focus on the following types of funds in your taxable account:

  • Stock funds
  • Treasury bonds
  • Tips
  • Munis
  • MLPs
  • Royalty Trusts

Keep these assets in your tax deferred accounts:

  • Total Bond Funds
  • Corporate Bond Funds
  • CEFs
  • REITs

 

Make every effort to offset gains and losses to minimize your tax liability when you are rebalancing your portfolio. Outside of your investment accounts, if you want to reduce your overall tax bill you can consider the following strategies:

  • Maximize 401(k) contributions
  • Contribute to HSA/MSA
  • Prefund Charitable Gifts (Donor Advised Fund)
  • Education Expenses (Tuition & Fees)


 

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