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Glossary: Portfolio Advantage®

TERMS AND DEFINITIONS

Account Type

Indicates the type of “registration” for an account. An account may be either Taxable, Tax-Deferred, or Tax-Free. The account type is significant in helping to determine where to best place the assets across the different accounts to achieve the best Taxficient Score® and highest after-tax returns.

Asset Location

Asset location is a tax-minimization strategy of placing investments in accounts that will ultimately produce the highest after-tax returns for the investor’s entire portfolio. The process is to put your highly taxed investments in your IRA and Roth accounts, and your tax-efficient assets in your brokerage accounts.

Capital Gains Tax Rate

The tax rate applied to long-term capital gains; sales of assets held for more than one year and that have appreciated in value since purchase. The user can set the default Capital Gains Tax Rate in the Settings page and can also set a portfolio specific rate by editing the portfolio’s details. Sales of any appreciated assets held for a year or less are considered short-term capital gains and are taxed using the Ordinary Income Tax Rate.

Capital Market Assumptions (CMAs)

These are forecasted estimates of an asset category’s expected total return. In addition to the total yield, the CMAs may also include yield, dividend, turnover, standard deviation, and equivalent asset groups (substitute asset classes). When determining the after-tax return of an asset category held in a taxable account, any portion of the total return designated as dividends is taxed at the capital gains tax rate (i.e. is treated as a qualified dividend) and any portion designated as yield is taxed at the ordinary income tax rate, except for tax-free fixed income where no taxes are deducted. Any capital appreciation associated with an asset category is taxed according to the turnover rate.  Any turnover up to 100% is considered long-term, meaning the capital gains rate is applied according to the rate provided. Any turnover above 100% is considered short-term, meaning the ordinary income tax rate is applied to that portion.

Custodied Accounts

Accounts in which the assets are currently managed by the advisor, or custodied at the advisor’s affiliated institution.

Excluded Accounts

Accounts within the client’s portfolio that will not be included or considered in any Taxficient Score® calculations, or any other LifeYield calculations or projections. Accounts types that may often be excluded include: 529 plans, 401k plans, & RAs.

Held-Away Accounts

Accounts in which the assets are not actively managed by the advisor or custodian affiliated with the advisor’s financial institution. Advisors may often have access to view these accounts by using account aggregation software tools and with the permission of their clients. Including the held-away accounts in the Taxficient calculations often incentivizes the client to consolidate these assets with the advisor.

Investment Time Frame

A user selected time period used in the Taxficient Score® projections. After-Tax returns, balances, and yearly tax costs are projected over this time frame. The time frame may be set to 10, 15, 20, 25, or 30 years in duration. The advisor sets the Investment time frame for the client in the settings page.

Ordinary Income Tax Rate

This is the tax rate on a client’s ordinary income. It is set by the advisor and is a blended rate based upon a client’s expected state and federal income taxes. The advisor sets the Ordinary Income Tax Rate for the client in the settings page.

Proposed Portfolio

The suggested asset allocation across the different registrations of Taxable, Tax-deferred and Tax-free for achieving the highest Taxficient Score® and highest portfolio after-tax returns. This is created when generating a proposal.

Projected Portfolio Balance

Projects the potential yearly portfolio balances during the selected investment time frame. Illustrating and comparing the yearly after-tax return balances for the Taxficient Score® of Worst, Current and Best. Created when generating a proposal.

Equivalent Asset Groups

Assets that are similar to the client’s primary asset categories. They may be substituted in the different registration types in order to deliver the highest after-tax returns while maintaining the portfolio’s target allocation.

Projected Portfolio Taxes

Projects the potential yearly taxes incurred during the selected investment time frame. Illustrating and comparing the yearly tax costs for the Taxficient Score® of Worst, Current and Best. This is created when generating a proposal.

Taxficient Score®

A Taxficient Score® measures the tax efficiency of an investment portfolio, on a scale from 0 to 100. LifeYield calculates the Worst, Current and Best Scores.

  • Worst: projected after-tax returns of a client’s assets when they are distributed across the different account registrations where they will perform with the lowest tax-efficiency, thus returning the lowest balance over time.
  •  Current: projected after-tax returns of the client’s current asset location across the different account registrations.
  • Best: projected after-tax returns where a client would get the maximum benefit. A score of 100 means giving up as little as possible in taxes on investment returns, leading to a higher balance over time.