Goals-based planning

This powerful strategy can create more spendable wealth

Investment portfolios have something in common with high income earners: The money may be flowing in, but the well-compensated can still struggle to build wealth if a large chunk of what they’ve earned is consumed by spending or servicing debt.

The same holds true for the investment portfolios of high- and ultra-high net worth individuals. They may be earning strong returns, yet those may not translate into more spendable wealth if high tax rates create an ongoing tax liability—often referred to as tax drag—that is systematically consuming a portion of portfolio returns.

Tax drag cannot be eliminated, but there are a number of ways to reduce it. Here we discuss one thoughtful approach: Intentionally choosing the right type of account in which to hold your assets1—a tax planning concept called asset location. (It shouldn’t be confused with asset allocation—diversifying across asset classes, balancing risk and return, spreading and managing risk.)

Asset location is a demonstrably powerful strategy for creating more spendable wealth.

Finding the right landing spot for your investments

Asset location involves strategically placing investments in the optimal type of account: taxable, tax-deferred or tax-free. When properly implemented, tax-aware asset location can enhance portfolio returns by 0.2% to 0.5% annually, studies have shown.2

Of course, factors such as your tax rate, time horizon, the account types you have access to (and your particular investment instruments) will influence the strategy’s impact.

Understanding account types

Setting aside, for our purposes, real estate and other real assets, a portion of your balance sheet is liquid: equities, fixed income, liquid alternative investments and cash. Asset location begins with recognizing that generally three types of accounts can hold those assets, each with distinct attributes:

  • Taxable accounts: These include brokerage account and revocable trust accounts. Among their advantages: preferential tax rates for qualified dividends3 and long-term capital gains, the abilityto harvest losses, and a step up in cost basis at the account owner’s death. As their name suggests, taxable accounts are subject to ongoing taxation on ordinary income, dividends and capital gains.
  • Tax-deferred accounts: Most commonly, Traditional IRAs and 401(k)s are retirement account types that allow investments to grow without immediate tax consequences. Taxes are paid upon withdrawal, typically at higher ordinary income tax rates for high and ultra-high net worth individuals. Tax-deferred accounts are also not eligible for a step up in cost basis and forfeit the ability to harvest losses.
  • Tax-free accounts: Roth IRAs and college-savings 529 plans provide tax-free growth, and tax-free withdrawals as well, provided certain conditions are met. Investors often consider these accounts the most valuable.

Determining the most tax-efficient account type

An investment’s return potential, and its tax efficiency, determine the optimal account location, as the diagram illustrates.

Return potential and tax efficiency determine an asset’s best location

Assets best placed in taxable, tax-deferred and tax-free accounts

Source: 2025 Long-Term Capital Market Assumptions. Data as of September 30, 2024.

Let’s unpack the diagram:

High tax efficiency, high return potential assets: Tax-efficient asset classes with higher return potential, such as private equity and stocks with a low turnover, are best suited for taxable accounts because they’re already benefiting from preferential tax rates. (They would take a long time to realize the advantages of tax deferral.) In these cases, moving into a tax deferred account would involve a tradeoff: giving up ongoing taxes at lower preferential rates in exchange for a tax liability at (likely higher) ordinary income tax rates in the future. (A theoretical scenario for a taxpayer in the highest bracket: Moving a private equity fund that mostly generates long-term capital gains into a tax-deferred account would mean trading a 23.8% tax rate today for a 37% rate in the future.)

Moderate tax efficiency, lower return potential assets: Investments such as intermediate Treasuries and global infrastructure, which have lower return potential and/or moderate tax efficiency, may be appropriately located in taxable or tax-deferred accounts. The impact of their location is small.

Tax-inefficient assets with higher return potential: Private credit and high yield bonds, for example, would receive an immediate benefit from being located in a tax-deferred account. The income these asset classes generate is taxed at higher ordinary income rates than other types of income, such as long-term capital gains or qualified dividends, so deferring payment makes sense.

If you have access to tax-free account types, they are excellent locations for assets with the highest returns and least tax-efficiency. When placing investments in tax-free accounts it is reasonable to prioritize their growth over tax efficiency.

Amplified benefits for high income earners

The cost of getting account location wrong is forfeiting what we call asset location alpha. An example of that might be when an investor owns a tax inefficient investment instrument in a taxable account that could have been owned in a tax-advantaged account type. Such location errors become especially pronounced when you’re subject to top tax rates. The disadvantage becomes ever more costly if tax rates rise over time, and as the years pass, as the table illustrates.

Forfeiting asset location alpha can mean losing an after-tax return lift—of as much as a percentage point over time

Theoretical improvement in after-tax return by tax bracket, tax-deferred vs. taxable account

Source: 2025 Long-Term Capital Market Assumptions. Data as of September 30, 2024.

Purchasing additional tax deferral

The Internal Revenue Code, the U.S. law governing taxation, recognizes the benefits of tax deferral and as a result, imposes contribution limits and phaseouts on certain account types. Consequently, high-income earners often face restrictions on how much they can contribute to more traditional tax-advantaged accounts such as IRAs and 401(k)s.

A private placement variable annuity (PPVA) can be an effective solution if you:

  • Intend to hold tax-inefficient investments with relatively high expected returns
  • Plan to relocate to a lower-tax jurisdiction in the future
  • Expect to make charitable bequests

In those cases, it may make sense to purchase additional tax deferral through a PPVA.

A PPVA would enable you to access tax deferral on a selection of investments, including alternative assets that are not typically available in standard annuities. However, the IRS taxes withdrawals from a PPVA as ordinary income, and withdrawals prior to age 59½ may be subject to penalties. Despite these important considerations, for high-income earners seeking additional tax-deferral, a PPVA can be valuable.

We can help

Where to put which investments is obviously a complex question—but one well worth considering carefully. Your J.P. Morgan team is available to work with you and your tax advisors to help you make sure your decisions truly support your long-term goals.

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JPMorgan Chase & Co., its affiliates, and employees do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal and accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction. The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved.

JPMAM Long-Term Capital Market Assumptions: Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only—they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Outlooks of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations. “Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only—they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any assumptions, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.

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Any views, strategies or products discussed in this content may not be appropriate for all individuals and are subject to risks. Investors may get back less than they invested, and past performance is not a reliable indicator of future results. Asset allocation/diversification does not guarantee a profit or protect against loss. Nothing in this content should be relied upon in isolation for the purpose of making an investment decision. You are urged to consider carefully whether the services, products, asset classes (e.g., equities, fixed income, alternative investments, commodities, etc.) or strategies discussed are suitable to your needs. You must also consider the objectives, risks, charges, and expenses associated with an investment service, product or strategy prior to making an investment decision. For this and more complete information, including discussion of your goals/situation, contact your J.P. Morgan team.

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Enhance your after-tax returns by strategically selecting where you hold your investments

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