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Strategic sorting: As stated here, one primary way to enhance the tax efficiency of your portfolio is through strategic asset location. This involves sorting your assets into taxable or tax-advantaged accounts depending on their yield, tax rate and potential “tax drag”. Each asset is allocated to a particular account with the priority of tax efficiency in mind, so in the instance of least tax-efficient holdings, they would be placed in the greatest tax-advantaged account.

The “yield-splitting” method: In the case of index funds, the tax strategy here includes replacing them with a corresponding pair of funds: One low-yield, tax-efficient fund and one high-yield, tax-inefficient fund. Otherwise known as “yield-splitting”, this mirrors the performance of broad-based index funds in such a manner that allows the new funds’ low and high-yielding components to be invested into two different accounts.

In the end, the funds are invested separately to maximize the overall tax savings, and it’s a move that can also be made to replace a total-bond-market fund with a high-yield corporate bond fund. Maintaining focus on asset location, in addition to layering the yield split methodology across core index holdings, can result in a six percent increase of wealth accumulation and bring substantial tax savings for those who pay a high Federal tax rate over the long term.

Above all: One of the key elements of a good financial plan is efficiency, and that certainly includes in the tax planning realm. Looking forward, this will only become more important as time goes on.