Don Duncan and Morningstar Head of Retirement Research David Blanchett are presenting “How to Maximize Your After Tax Wealth” through the CFA Society of Chicago in recognition of Money Smart Week 2014. The presentation will primarily be focused on major strategies one can implement to maximize their after tax wealth; including asset location, dedication and diversification. The presentation will be completely free to all who register and are interested in finding out how taxes impact financial planning and investment management.
2014 CFA Chicago Money Smart Week - Don Duncan and David Blanchett
1. MONEY SMART WEEK PRESENTATION
HOW TO MAXIMIZE AFTER TAX WEALTH
THROUGH ASSET LOCATION, DEDICATION
AND DIVERSIFICATION
Donald D. Duncan MBA CPA CFA CFP
President and Owner of D3 Financial Counselors
April 10, 2014
2. 5 TIPS TO MAXIMIZE AFTER TAX WEALTH
• Three topic areas below all focus on increasing probability of achieving financial
planning Goals by applying smart tax planning
• Asset Location
- Tax Qualified (non tax efficient assets) After Tax (tax efficient)
• Asset Dedication
- Education (529), Legacy (Roth IRAs), Charity (Donor Advised Funds)
• Asset Diversification
- Retirement Income Tax and Cash Flow (SO, RSU, ESPP)
- Family Income Tax (SNT)
- Best Retirement Plan (Cash Flow Sources)
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3. ASSET LOCATION
• Self directed IRAs for maximizing tax qualified investment flexibility
• Brokerage accounts for after tax money
• Life insurance cash value or annuities for deferring current investment income
• Roth IRAs for legacy intentions and tax diversification
• Donor Advised Funds
• Gifting to a low tax bracket
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4. ASSET DEDICATION
• Specific financial planning goals have limited time lines, volatility constraints and
tax implications
• Dedicate specific assets with similar time lines
• Dedicate specific assets with similar time horizon volatilities
• Take advantage of specific account tax opportunities (529 Accounts, Donor
Advised Funds)
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5. ASSET DIVERSIFICATION
• Modern portfolio theory based on “rational investors, independent and linear
relationships and normally distributed price functions (unfortunately it does not explain
the frequency of fat tail events i.e. black swans)
• Modern portfolio theory, mathematically shows that diversification with non-correlated
assets reduces portfolio risk and increases return
• Diversification works in the financial markets, just not all the time
• Post modern portfolio theory: the new normal is normal distributions cannot explain
price functions if market participants are not always rational and move in the same
direction
• Asset Diversification is used to generate target cash flows
- Focus on streams of cash flow that are non-correlated
- Cash flow diversification buys time during fat tail events
• Cash flow diversification is just as important as portfolio diversification from a financial
planning success perspective (i.e. not running out of money or bailing out)
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8. EXAMPLES OF NON-CORRELATED, TAX
DIFFERENTIATED CASH FLOWS
• Bond Investment Interest Payments
• Stock Investment Dividend Payments
• Social Security
• Pensions
• Annuities
• Rental Income
• Equipment Leases
• Royalties
• Part time earnings
• Life Settlements
• Business Income
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9. EXAMPLES TO MAXIMIZE AFTER TAX WEALTH
• Asset Diversification
- Retirement Income and Cash Flow Tax Bracket Harvesting (Stock Options,
Restricted Stock Units, Employee Stock Purchase Plan)
- Family Income Tax Bracket Arbitrage (Special Needs Trust)
- Best Retirement Plan (Diversified, Non- Correlated Cash Flow Sources)
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10. CONCLUSION
• Situation: understand the unique aspects of the asset
• Dedication: determine the specific purpose
• Integration: use a consolidated/holistic viewpoint
• Allocation: calculate the expected return
• Diversification: understand asset correlations
• Location: take advantage of tax opportunities
• Liquidation: forecast tax brackets, longevity and liquidity
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