Strategy
Where each dollar sits decides what you keep.
Tax-efficient investing is a set of decisions that lower what a portfolio pays in tax without changing what the portfolio is for: which account holds each asset, when gains and losses are realized, and what form the income takes. The 2026 rules leave real room to work with, including a 0% federal rate on long-term gains up to $98,900 of joint taxable income and a 61-day wash-sale window that decides whether a harvested loss counts at all.
The situation
The tax bill is a set of choices, not a line item.
Two households can own the same funds in the same proportions and pay very different tax. One holds its bond fund in a taxable account and its stock index in an IRA; the other does the reverse. One sells a winner in December because the news was bad; the other waits three weeks for the holding period to pass one year. Neither difference shows up on a statement, and both compound for decades.
Tax is the one portfolio cost that is set partly by choice. Fund expenses are what they are, and returns are not ours to decide. But the account an asset lives in, the year a gain is recognized, whether a loss is harvested or wasted, and whether an appreciated share is sold, given or inherited are all decisions. Made in sequence and with the tax return in view, they are worth more together than any one of them alone.
This page is the method: what the tools are, when each fits, what each costs, and how we choose among them. It is not an argument for letting tax drive the portfolio. Our guide on when tax planning distorts the portfolio makes the opposite case, and we hold both at once.
Why it’s complex
Five decisions that set the after-tax result
Which account holds what
Asset location places each holding where its tax character costs least: interest-heavy and high-turnover assets in tax-deferred accounts, broad equity funds in taxable, the assets expected to grow most in Roth. The price is complexity. Each account no longer mirrors the whole, so rebalancing and the withdrawal order have to be planned across all of them.
How withdrawal order interactsHarvesting a loss that actually counts
A realized loss is disallowed if a substantially identical security is bought within 30 days before or after the sale, and the IRS reads that to include a spouse’s account and an IRA (Rev. Rul. 2008-5). The replacement has to be similar enough to keep the exposure and different enough to survive the rule. Direct indexing runs this at the single-stock level, with its own costs.
Direct indexing: when it pays offHow much gain to take this year
Long-term gains are taxed at 0%, 15% or 20% by taxable income, with the 3.8% surtax above $250,000 of joint modified AGI and a Medicare surcharge above $218,000 two years later. A gain budget decides how much to realize before each line, so diversification happens on a schedule rather than in one expensive year.
Where the 0% bracket endsWhat the fund does inside
A mutual fund must pass its realized gains to shareholders each year, whether or not they sold. An ETF can meet redemptions in kind and generally recognizes no gain when it does (IRC §852(b)(6)). In a taxable account that structural difference matters; in an IRA it does not. The same test applies to munis versus taxable bonds: the answer depends on the bracket, not on the label.
How we build portfoliosSell it, give it, or leave it
An appreciated share can be sold and taxed, given to a person who inherits the original cost, given to charity at full market value, or held until death, when the basis resets (IRC §§1014, 1015, 170). Each route has a cost: tax now, tax later for someone else, the asset leaving the family, or years of concentration risk while waiting.
What resets at death, and what does notSources: IRS Rev. Proc. 2025-32 §4.03; IRC §1411; IRC §1091 and Rev. Rul. 2008-5; IRC §1211(b).
Our approach
In the order the decisions depend on each other
Tax-efficient implementation only matters when it fits the broader plan, so the work starts with the plan and the tax return, not with a technique. We are fee-only. The recommendation to harvest, hold, give or relocate an asset earns us nothing beyond our fee, which is the point.
Map the household by account and by lot
Every account, its tax type, and every taxable lot with its cost basis, unrealized gain or loss and holding period. Alongside it, this year’s projected taxable income from your CPA’s estimate. Most of the tax opportunity, and most of the mistakes, are visible on that one map.
Set the location before the allocation moves
With the target allocation fixed, we decide which account holds each piece. Taxable bonds, REITs and anything with high turnover go where their income is sheltered. Broad equity funds sit in taxable, where qualified dividends and long-term gains get the lower rates and where a loss can still be harvested. Roth space goes to what we expect to grow most, because it is the last money to be taxed and often never is.
Budget the gains and harvest the losses
We set the gain to recognize against the 0% and 15% lines ($98,900 and $613,700 joint in 2026), the $250,000 surtax threshold, and the Medicare surcharge look-back. Losses are harvested when they exist and replaced with a different exposure, not a substantially identical one. New contributions and distributions do the rebalancing first, so sales are the last resort rather than the first.
Choose the route for the appreciated position
Staged sales inside the gain budget; shares to a donor-advised fund or charity, deductible at market value within 30% of AGI and, from 2026, above a 0.5%-of-AGI floor; shares given to family, who take over the original cost; or holding for the step-up. We model each against the plan and the household’s intentions with your CPA and attorney.
Keep it in sequence through Quarterly Rounds
Location drifts as markets move, and the brackets, the surtax and the law change. Each quarter we re-check the map, reconcile realized gains against the budget, and review what the coming year’s income will allow. The 1099s are a confirmation of decisions made in advance, not a surprise.
The work
What you’ll work through with us
- An account-by-account location map with every taxable lot, basis and holding period
- A target allocation placed across taxable, tax-deferred and Roth accounts
- An annual gain budget set against the 0% and 15% lines, the 3.8% surtax and the IRMAA look-back
- A loss-harvesting protocol with pre-selected replacement exposures that satisfy the wash-sale rule
- A fund-structure review of every taxable holding: distributions, turnover and the ETF versus mutual fund question
- A municipal versus taxable bond comparison at your marginal rate, federal and state
- A route for each appreciated position: sell, gift, give to charity or hold for the step-up
- Coordination with your CPA, including a year-end projection before the last trade of the year
Tax-efficient investing at the firm is led by Theo Halbardier, CFP®, CIMA®, CAIA®, the firm’s founder. The CIMA® curriculum covers after-tax portfolio construction and implementation; the CFP® work ties it back to the household’s return and plan. We are fee-only: no commissions, no product sales. About Theo
Questions
Common questions about tax-efficient investing
What is asset location, and how is it different from asset allocation?
Asset allocation decides how much of each asset the household owns. Asset location decides which account holds it. The allocation is set first; location then places interest-paying and high-turnover assets in tax-deferred accounts, broad equity funds in taxable accounts, and the assets expected to grow most in Roth accounts. The trade-off is that no single account looks like the whole portfolio, so rebalancing and withdrawals are managed across all of them.
Is tax-loss harvesting worth doing?
Often, in a taxable account. A harvested loss offsets realized gains, then up to $3,000 of ordinary income a year, and the remainder carries forward without limit. It defers tax rather than eliminating it, because the replacement holding starts from a lower cost basis. It is worth less to a household already inside the 0% gains bracket, and it fails entirely if a substantially identical security is bought within the 61-day window.
Do municipal bonds make sense for me?
It depends on your marginal rate, not on the word tax-free. Muni interest is exempt from federal income tax and from the 3.8% surtax, and often from state tax in the issuing state. It still counts toward how much of your Social Security is taxed and toward the Medicare income surcharge. We compare a muni’s yield after those effects to a taxable bond’s yield after your rate, and place whichever wins in the taxable account.
Are ETFs more tax-efficient than mutual funds?
Usually, for stock funds held in a taxable account. A mutual fund distributes the gains it realizes each year to every shareholder. An ETF can hand securities to a redeeming market maker in kind and generally recognizes no gain on that exchange, so it distributes far less. Inside an IRA or 401(k) the distinction does not matter, and for bond funds the gap is smaller. Structure is one input; the fund’s holdings and cost still decide.
Should I ever pay capital gains tax on purpose?
Yes, when the gain is cheap or the concentration is expensive. In 2026 a married couple pays 0% federal tax on long-term gains that fit under $98,900 of taxable income, which makes low-income years, including the years between retirement and required withdrawals, the natural time to realize gains and reset the basis. And when one position is most of a household’s wealth, the tax on selling is known and capped; the risk of holding is neither.
Should I hold appreciated stock until death for the step-up?
Sometimes. At death the basis of most inherited assets resets to market value, so the gain is never taxed. That argues for leaving highly appreciated shares alone when the plan does not need them and the position is a size the household can carry. It argues against holding when the concentration risk is large, when the money is needed within the household’s lifetime, or when a 0% year or a charitable gift could clear the gain sooner.
Do you replace my CPA?
No. Your CPA prepares the return and signs it; we make the portfolio decisions that determine what appears on it. We share the gain budget, the harvested losses and the location map before year end, and we build the CPA’s income projection into the plan. The work is better when both sides see the same numbers in advance.
Reviewed by Theo Halbardier, CFP® · Updated September 2026 · Figures current for 2026
Bring the statements. We will bring the map.
The first conversation is 30 minutes. A recent statement from each account is enough to start; no preparation needed.
Meet with us