Contributed by: Nicholas Brown, CFA, CFP
In wealth management conversations, the focus often lands on asset allocation, market performance, or investment selection. Yet one of the most influential drivers of long-term after-tax wealth has nothing to do with the market at all—it’s how your investment accounts are structured.
Most high-income earners and affluent families hold a combination of retirement accounts, brokerage accounts, trusts, and possibly entity-owned investments. While each account has its unique purpose, failing to coordinate their structure through a tax-efficient lens can result in significant erosion of wealth over time through tax drag.
This raises a critical but often overlooked question: Are your investments in the right accounts to begin with?
Understanding the Three Primary Account Types
At a high level, nearly every investment account falls into one of three tax categories:
1. Taxable Accounts
These include traditional brokerage accounts held individually, jointly, or in trust. Taxable accounts offer the greatest degree of flexibility and liquidity but are typically fully exposed to ongoing taxation in the year a taxable occurs.
- Interest is taxed as ordinary income.
- Dividends may qualify for preferential tax rates.
- Capital gains are taxed when assets are sold, and losses may be harvested to offset gains. Capital gains come in the form of short-term or long-term capital gains, with different tax rates for each type.
The lack of tax sheltering makes taxable accounts ideal for holding tax-efficient investments—such as municipal bonds, ETFs with low turnover, or even individual stocks, but the flexibility of taxable accounts allows investors to own almost any asset they would like.
2. Tax-Deferred Accounts
These include traditional IRAs, 401(k)s, SEP IRAs, and other retirement plans where contributions may be deductible and growth is tax-deferred until withdrawal.
Tax-deferred accounts allow investments to grow without the drag of annual taxation. But anytime the IRS provides a tax benefit, there is usually a corresponding trade-off:
- Withdrawals are taxed as ordinary income.
- Required minimum distributions (RMDs) begin at age 73 (or later, depending on law changes) and can force additional income to investors who may not need it.
- Early withdrawals can trigger penalties.
High-return, tax-inefficient assets are often best placed here—such as income-generating investments that would otherwise be heavily taxed in a brokerage account.
3. Tax-Free Accounts
Roth IRAs and Roth 401(k)s are the most common examples. Contributions are made with after-tax dollars, but qualified withdrawals are completely tax-free.
The long-term value of Roth accounts is especially high for those in a lower tax bracket today relative to what they expect in retirement. They also provide:
- No RMDs for original owners (Roth IRAs).
- Tax-free growth and distributions.
- Strategic estate planning advantages.
While contribution limits are strict, and income phaseouts apply in many cases, Roth conversions or backdoor Roth strategies may allow affluent individuals to participate meaningfully.
Why Structure Matters: Tax Drag and Asset Location
Asset allocation—choosing the right mix of stocks, bonds, and alternative investments—is foundational. But where those assets are located matters just as much.
This is the principle of asset location: aligning investments with the right account type to reduce tax drag and maximize after-tax return.
For example:
- High-yield bonds or REITs generate ordinary income and are typically better suited for tax-deferred accounts.
- Tax-efficient index funds and municipal bonds are typically best held in taxable accounts.
- Assets with high expected growth may benefit from being placed in Roth accounts, allowing gains to accumulate tax-free.
Failure to coordinate asset location can result in avoidable tax consequences year after year. Over decades, the compounded impact of this oversight can reach hundreds of thousands—even millions—for high-net-worth families.
Structuring for Your Goals, Not Just Your Holdings
Beyond tax characteristics, the purpose of each account should align with your broader goals. For instance:
- Liquidity needs may point to maintaining a robust taxable account.
- Legacy planning may benefit from irrevocable trusts or family limited partnerships, which are still taxable accounts and have their own tax considerations.
- Charitable giving might be optimized through donor-advised funds (DAFs) or qualified charitable distributions (QCDs).
- Business succession plans often require specialized entity structuring and investment flows.
Our goal at Granite Harbor is to guide clients through a process that starts not with products or strategies, but with understanding purpose and timing—what funds are needed, when, and for whom. From there, we apply the right mix of public and private investments to the correct account structure.
The Role of Coordinated Planning
Most investors don't suffer from lack of access to an investment account—they suffer from lack of integration. When tax professionals, investment advisors, insurance planners, and estate attorneys work in isolation, the structure of accounts is often an afterthought.
Coordinated planning helps solve this. By proactively structuring investment accounts with input from your entire advisory team, we can help:
- Lower current and future tax liabilities.
- Preserve family harmony by ensuring assets are aligned with estate goals.
- Improve liquidity positioning across time horizons.
- Integrate the efficiency of both public and private market investments.
This holistic view is especially important when planning for liquidity events, intergenerational wealth transfer, or philanthropic endeavors. Seemingly minor choices—such as which account to draw from first in retirement—can have ripple effects across decades.
A Strategic Advantage, Not a Back-Office Detail
Investment account structure isn’t just a technicality—it’s a strategic decision that touches nearly every area of your financial life. From tax outcomes to estate planning, liquidity access to portfolio construction, the way accounts are set up and funded can be just as important as what’s inside them.
By taking the time to structure your accounts correctly, and review them regularly, you not only reduce tax drag but create a foundation for clarity, control, and confidence in your wealth plan.
At Granite Harbor Advisors, we believe that the most powerful financial outcomes stem from intentional design, not reactionary decisions. Our clients benefit from a team-based approach that brings together planning, investment, tax, and insurance disciplines under one roof.
It’s not just about growth, it’s about growing with purpose, and ensuring your structure supports your long-term vision.