Darnel Berntz shares why now is the most promising time in 25 years to create “tax alpha” through proactive, tax-efficient portfolio management. Drawing on decades of experience, Berntz explains how evolving strategies and legislative awareness can help clients minimize tax burdens and grow wealth sustainably.
Managing portfolios that are growing in real value while showing paper losses for tax purposes requires precision, and when done right, it can significantly reduce a client’s tax bill.
This ability to create value for clients by managing tax efficient portfolios has always been a key role of an advisor, but I believe we are now living in a golden age for creating this “tax alpha.”
While direct indexing opened the door to more programmatic tax-loss harvesting, the rise of flexible separately managed accounts means the opportunity set has grown tremendously, providing more prospects for tax efficient solutions. For example, long/short SMAs offer the potential for a loss position to create more possibilities for harvesting incremental losses.
In 25 years as a financial professional, I’ve rarely seen this level of flexibility and potential to add tax alpha.
Asset location
Asset location—deciding what goes into taxable, tax-deferred, or tax-exempt accounts—is an important strategy for helping preserve after-tax returns.
We generally place income-heavy or less tax-efficient investments, such as high-yield bonds, into retirement or tax-sheltered accounts. Meanwhile, municipal bonds or investments with naturally tax-efficient income, such as qualified dividends or certain real estate investments, fit better in taxable accounts.
Real estate, for instance, often provides depreciation benefits that offset income, making much of it effectively a return of capital and therefore not taxed.
In my experience, it’s about maintaining diversification while ensuring each asset sits in the most tax-efficient location.
To optimize capital gains tax planning, the goal is to reach long-term capital gains status wherever possible since the tax advantage is significant.
When trading, I try to stay mindful of how long we’ve held a position and whether the gain qualifies as long-term. That timing can make a dramatic difference in what the client ultimately keeps.
Keeping up with legislation
Tax laws and legislation shift constantly, so flexibility is essential. Every financial plan I create is designed to evolve rather than remain static. In my view, the best plans are living documents that are continuously revised in collaboration with clients and their tax professionals as laws, markets, and needs evolve.
We often model multiple potential tax outcomes to be ready for a range of legislative possibilities. As guidance becomes clearer, we update assumptions and fine-tune the plan. Staying informed, agile, and proactive is what helps clients navigate change with confidence.
Liquidity plays a big role in flexibility. Portfolios need the right balance between liquid and illiquid investments so we can adjust quickly when tax or market conditions shift. Being able to maneuver asset allocations is vital to maintaining tax efficiency and protecting returns.
Diversification is key
One of the most common and rewarding challenges I deal with is helping clients diversify out of large, concentrated stock positions, often in major tech names that have soared over the last decade, without triggering enormous capital gains all at once.
We’ve used strategies like exchange fund replication (through options and SMAs) and flexible long-short indexing to offset losses while trimming appreciated holdings. This approach lets clients reduce single-stock risk while saving significantly on taxes over time. For many, that’s a life-changing outcome.
Tax efficiency in retirement planning
For clients nearing or entering retirement, tax efficiency takes on a new dimension.
Many retirees have a few “quiet” years between leaving work and starting required minimum distributions. During that window, it can make sense to do partial Roth conversions, essentially prepaying taxes while in a lower bracket.
That strategy smooths out the tax burden over retirement and reduces future required minimum distribution (RMD) obligations since Roth accounts don’t require distributions. There’s usually a “tax trough” before RMD years, and smart planning there can make a big difference in lifetime taxes paid.
But it’s increasingly common to see people working longer, sometimes by choice, sometimes out of fear of stopping income. The toughest part for many isn’t financial but psychological. Shifting from saving and earning to living off investments is a big change in mindset, and ironically, continuing to work can sometimes reduce tax planning opportunities.
For example, ongoing earned income may push someone into a higher bracket, limiting their ability to do Roth conversions or other tax-optimization moves. In those cases, working longer isn’t always the financial advantage people assume it is.
Some retirees consider moving to a new state and tax implications are important to consider. For clients in high-tax states like California or New York, the idea of moving to lower-tax states such as Texas, Nevada, Florida, Wyoming, or even Montana, comes up frequently.
We model those scenarios carefully, but we also caution clients that states like California tend to be aggressive about enforcing residency rules.
For many, lifestyle and family considerations outweigh the tax savings. Relocating is a highly individual decision, and the right answer depends on much more than just the math.
My job is to help clients feel confident in their plan and to show them that their portfolio can work for them after years of disciplined saving. That’s one of the most rewarding parts of what I do.
Year-end strategies
As the year ends, timing becomes especially important. If you have investments to sell or a liquidity need, it’s often beneficial to spread capital gains across two tax years, say, some in late 2025 and some in early 2026.
Another tactic is to consider borrowing against your portfolio late in the year and repaying the loan early in January. That short-term bridge can defer gains into a new tax year, giving you a full 12 months to harvest losses to offset them. It’s small adjustments like these that can yield big tax savings over time.
Ultimately, tax efficiency isn’t about gaming the system, it’s about thoughtful planning, staying flexible, and using every available tool to help clients keep more of what they earn.
Whether it’s through smart asset placement, long-term capital gains management, or year-end timing strategies, the goal is always the same: grow wealth efficiently and sustainably.
Tax laws change, markets evolve, and client needs shift, but the commitment to being proactive and adaptable never does.
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this article is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the publication of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein. The information provided here should not be considered to be insurance, legal, or tax advice and all investors should consult their insurance, legal, and tax professionals about the specifics of their own insurance, estate, and tax situations to determine any proper course of action for them. KAR does not provide insurance, legal, or tax advice, and information presented here may not be true or applicable for all investor situations. Past performance is no guarantee of future results.
