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What is "householding"?

“Householding” means jointly managing multiple accounts (like a Roth IRA and a taxable account) to a single asset allocation. With householding, the focus is on the asset allocation of the combined holdings across all accounts, not the asset allocation of each account (though individual accounts may have their own asset allocation restrictions, e.g. “no alternative investments in the IRA”, “equities in the taxable account should not be less than 25% or more than 75% of the taxable account”).

What is tax-optimized householding?

“Tax-optimized” householding means jointly managing multiple accounts to a single asset allocation in a manner that minimizes taxes and transaction costs. There are (at least) six components to tax-optimized householding:

  1. Avoid unnecessary turnover across accounts, e.g. avoid reducing exposure to equities in one account while increasing exposure in another, especially if this involves realizing capital gains in a taxable account.
  2. Preferentially implement household-level asset-class rebalancing in tax-advantaged accounts. That is, use tax-advantaged accounts like IRAs as “tax free rebalancing centers”. This serves to minimize tax on capital gains.
  3. Preferentially hold tax-inefficient securities, like bonds, in tax-advantaged accounts. This serves to minimize tax on dividend and interest income (as well as capital gains distributions from mutual funds, ETFs and limited partnerships).
  4. Avoid wash-sales across accounts in a household.
  5. Manage each taxable account in a tax-optimized manner, i.e loss harvest and optimally select tax-lots when selling.
  6. Avoid holding muni-bonds and other tax-favored vehicles in tax-advantaged accounts.

Household tax management is sometimes conflated with #3 above (hold tax-inefficient securities in tax-advantage accounts to minimize tax on income), but there’s a lot more to it. Note that there’s some tension between #2 (use tax-advantaged accounts as tax-free rebalancing centers to minimize capital gains taxes) and #3 (hold tax-inefficient securities in tax-advantaged accounts to minimize tax on income). To use a tax-advantaged account as a tax-free rebalancing center, you need that account to hold a little of every asset class. This may conflict with, say, holding only bonds in the IRA to avoid tax on interest.

Doing tax-optimized householding well is complex, and doing it manually would be prohibitively expensive for all but ultra-high net worth accounts. The good news here is that every element of account and household management we’ve mentioned can be automated, which makes it economically feasible to offer high-end householding to all investors.

What is Smartleaf's Unified Managed Household (UMH) functionality?

Smartleaf allows you to link accounts to form a household and set a household-level target asset allocation. Smartleaf’s system will ensure that the holdings of the multiple accounts, if combined, mimic the target asset allocation for the household as a whole. And we’ll do so in a way that:

  • preferentially rebalances in tax deferred accounts to avoid taxes on realized gains.
  • avoids wash sales across accounts.
  • minimizes trading and turnover, e.g. “don’t sell equities in one account and buy them back in another, unless instructed otherwise”.
  • follows your product preferences for each account, e.g. “when buying fixed income in taxable accounts, buy bonds, in other accounts buy corporate bonds”.

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