The shifting from summer to fall always fills me with an urge to prepare. It’s not necessarily clear what I’m preparing for, but slowly darkening days, cooling temps, and seeing the harvest being brought in across the farms in our area triggers something deeply rooted inside me to know that change is on the horizon and it’s time to get ready.

Professionally, there is a similar change in focus that occurs as October comes around, but, fortunately, the cause of this shift is more clearly understood. Each year as we enter the fourth quarter, CCM’s integrated team works in partnership to finalize and execute clients’ year-end tax plans. This is an exercise that includes not just the CPAs, but also the investment and financial planning teams, as we all have a role to play in the optimization of outcomes.

Although the CCM Investment Team is responsible for the research, construction, and trade execution that goes into the management of client portfolios, I learned early on in my career that although the returns that our clients experience truly matter to their financial outcomes, if we don’t properly prepare for the reality of how those returns are received, we are only doing part of our job.

Customized Approach

The Investment Team’s preparation for annual tax planning actually begins before any dollars are deployed into an asset allocation when a new client comes onboard at the firm. It’s our responsibility as a fiduciary and trusted partner to build portfolios using the optimal investment solutions to help meet each client’s specific needs. For most people, that will be through the utilization of mutual funds and exchange traded funds (ETFs) that allow for low-cost exposure to a globally diversified mix of stocks and bonds.

However, for others who may have legacy holdings that have been a part of their portfolio for a long time and carry high levels of appreciation, we may be unable to reallocate into these types of funds without incurring large, taxable gains.

For example, if someone was compensated with their employer’s stock throughout their career and was fortunate to experience strong growth, it doesn’t always make sense to just sell everything to start fresh. In these cases, we have other solutions, like direct indexing, that can allow us to maintain some or all of their highly appreciated positions while still accomplishing the goal of building a diversified portfolio. Addressing each client’s specific circumstances to meet their unique needs is a key to success.

Tax-efficient Funds

When selecting funds to include in a portfolio, it’s important to note that not all funds are created equally when it comes to taxation. Some mutual funds try to outguess the market by picking stocks or making tactical timing bets that can force upon their shareholders large and unwanted tax surprises if held outside of a retirement account. Morningstar calls this the tax-cost ratio.1 It can be thought of as the lost value of an investment caused by ongoing taxation of a fund. In one infamous example, due to a large portfolio strategy change, a widely known mutual fund distributed such a large capital gain at the end of 2018 that its after-tax three-year return is only about half of the pre-tax value.2 So, when pursuing these types of strategies, even if you win, you still may lose.

This is one reason we target mutual funds that actively try to reduce the impact these types of distributions can have on an individual’s tax situation. It’s also why we have a focus on using exchange-traded funds, as this structure can help to reduce the likelihood of taxable distributions even further.

Asset Location

Because we know that certain types of accounts like pretax IRAs, Roth IRAs, and individual brokerage accounts have different tax implications, rather than manage each account in a client household separately, we view accounts collectively in targeting our clients’ desired asset allocation. By locating certain types of assets in these various accounts, we can optimize the total after-tax return a client experiences. In one study conducted by Vanguard, it was concluded that managing a portfolio in this manner could add 0.74% to an individual’s after-tax return when compared to a portfolio that ignored the tax implications of their location decisions.3

Also, by locating assets strategically based on the specific needs of each of our clients and managing in view of the total portfolio, it can allow us to target our rebalancing efforts to reduce or eliminate current tax impacts. These are the types of benefits you can receive when you prepare.

Tax Loss Harvesting

No one enjoys having the value of their investments go down, but we know that bearing the risk of loss is one reason why we’re rewarded as investors. Especially in stocks, to capture the relatively high returns that we have experienced in the past and expect in the future, it comes with the knowledge that there will be periods of loss. And if the value of an investment goes below the purchase price, we can turn a negative into a positive by selling the first investment and buying something similar on the same day. The act of selling is what allows the loss to be used to offset gains, and the act of buying is what allows you to participate in the future recovery.

This isn’t always an applicable strategy for all portfolios during all market drawdowns, but when possible, it can add significant long-term value to after-tax returns. For example, with markets performing so strongly thus far in 2021 with relatively little downside volatility, there have been few opportunities to capture losses for most. Though in 2020, with the large global stock market drawdown in the first quarter, we were able to book tens of millions of losses for our clients, even though the returns for the year ended up sharply positive.


Proper portfolio management alone can’t solve tax-related issues, but improper management can certainly cause them. A thorough understanding of the interconnectedness of investments and taxes is key to achieving ongoing and reliable success up to and through retirement. As the old saying goes, it’s not what you make, it’s what you keep, and we work hard to help you keep what you earn.

  2. Morningstar Direct as of 9/30/2021. Calculated by comparing the difference of the Post-tax Return (Pre-liquidation) Annualized 3 year and the Total Return Annualized 3 year.;
  3. Vanguard Advisors: (Article 2021)

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.