Leveraging Asset Location Strategies for Your Retirement

Provided By Matt Harlow, CFA, Chief Investment Officer at Larson Financial Group

As seen in the Georgia Medical Group Management Association’s Newsletter

Whether your retirement is right around the corner or several years away, it’s important to recognize how the assets in your portfolio are allocated to maximize tax efficiency. Tax efficiency is one of the more controllable aspects of investing, however it should not be the sole consideration when making decisions regarding your investments. A balanced portfolio will allow you to forecast your post-practice income with a greater degree of certainty.

There are 3 types of accounts that you can invest your money in from a retirement standpoint which are classified by how and when they are taxed. Understanding the different rules that apply for these types of accounts will allow you to develop a retirement plan that is commensurate with the desired level of risk that you are comfortable with undertaking.


Physician Retirement Planning


Taxable: Examples of this would be bank/brokerage accounts, trust accounts and holdings in stocks and bonds. Funds would be taxable based on interest, short-term gains, long-term gains and dividends. These type of accounts are preferable for short-term investments because of the liquidity that they offer.

Tax-Deferred: IRAs, 401(k)s and other pension plans are a few examples of tax-deferred accounts. Money in these accounts will grow tax-free but is taxed as ordinary income when withdrawn for retirement. Your tax bracket upon reaching retirement will largely be decided by the current tax rates set by the federal government if you hold the majority of your savings in a tax-deferred account.

Tax-Advantaged: Some examples of tax-advantaged accounts would be Roth IRAs, Roth 401(k)s and investment life insurance policies. Money in these accounts will grow tax free and can be withdrawn tax free during retirement as long as the guidelines for these accounts are followed.

Generally, we advocate that our physician clients keep no more than 50% of their retirement savings in tax-deferred accounts. There are a few different ways you can shift money from a tax-deferred account to a tax-advantaged account. One example is a Roth conversion, also known as backdoor Roth IRA, which allows you to fund a Roth IRA using money that is held in a traditional Roth account. However, in the case of a Roth 401(k), opening one of these accounts will disqualify you from having a traditional 401(k).

Research has shown that tax-efficient distribution of assets can add up to 0.75% to annual net returns. The primary objective of Larson physician financial advisors is to boost the after-tax returns of their physician clients by strategically investing specific asset classes in these different account types. Generally, we recommend holding broad-market equity investments in taxable accounts while holding taxable bonds within tax-advantaged accounts. Doing this generates higher and more certain returns by spreading the yield between taxable and municipal bonds.

Striking the right balance between assets in taxable, tax-deferred and tax-advantaged buckets should allow you to determine what tax bracket you want to fall in when you retire from practicing medicine. Several factors such as inflation, longer life spans and the rising cost of care lead to uncertainty when assessing options for physician retirement planning. However, maximizing the tax efficiency of your investments will allow you remove a major variable from the equation so that you can calculate your post-practice income with more certainty. Minimizing the total taxes paid will ultimately increase the longevity of a portfolio and allow you to keep a greater share of the wealth.


Have Questions?


Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.