Introducing the Smart Contribution Score™

ComposedPro has developed a way to score how well your portfolio is balanced across taxable, tax-deferred, and tax-exempt accounts.   Having a well-balanced portfolio means more flexibility in retirement.  It also opens up opportunities to increase your Smart Location Score™. 

The Smart Contribution Score™ is based on a simple rule:  each of the three types of accounts (taxable, tax-deferred, and tax-exempt) should contain 25-50% of your portfolio value.

To determine your score, we look at the proportionate balances you have across taxable, tax-deferred, and tax-exempt accounts.  The calculation is 100% minus the absolute variance that any type of account is outside the 25% to 50% range.   Two examples below may help depict this calculation.

Calculation

Assuming the proportionate balances as shown in the picture above, the Contribution Location Score™ is low at 42.2%.  This is calculated as follows:

42.2% =

• 100%
• Less 28.9% (the amount that the taxable balance is above 50%)
• Less 5.6% (the amount that the tax-deferred balance is below 25%)
• Less 23.3% (the amount that the tax-exempt balance is below 25%)

This portfolio could benefit from a smarter contribution strategy in the future. 

Disclosures:

Please note that higher tax-deferred balances could result in higher required minimum distributions (RMDs) in retirement.  This should be considered when implementing any contribution recommendations or other such strategies that seek to optimize across tax-exempt, tax-deferred, or taxable accounts.  If you are seeking to minimize RMDs, a contribution strategy that recommends a higher tax-deferred balance in your portfolio may not be appropriate.  Please consult your tax advisor when implementing any strategy that attempts to lower income taxes.

Clients may not realize the benefits of asset location or other strategies discussed herein. Factors that affect an asset location strategy include, but are not limited to, market performance, the relative size of each account included in the financial plan, the equity exposure of the portfolio, the frequency and size of deposits into the various accounts, the tax rates applicable to the investor in a given tax year and in future years, and the time elapsed before the liquidation of any of the accounts becomes necessary.

Nothing herein should be interpreted as tax advice.  ComposedPro does not represent in any manner that the tax consequences described herein will be obtained or result in any particular tax consequence. Please consult your personal tax advisor as to whether ComposedPro's asset location strategy is a suitable strategy for you, given your particular circumstances. The tax consequences of asset location are complex and uncertain. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. ComposedPro assumes no responsibility for the tax consequences to any client of any transaction.