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 assets – 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.)
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 dividends and long-term capital gains, the ability to 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.
Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank.
r.barragan@jpmorgan.com | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
Source: “This powerful strategy can create more spendable wealth” Tom Lenkiewicz, senior wealth strategist and head of retirement & asset location, Oct. 17, 2025
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