Pro Spotlight: A Champion for Tax-Smart Investing

Q: How did you come to focus on the wealth and tax side of asset management?

A: I actually went to a performing arts high school for musical theater. Unfortunately, my singing voice leaves something to be desired. When it was time to decide what was next, my family asked if I would please pursue something a little more conventional. So I went to college, majored in economics, continued on to law school, and thought I would practice entertainment law. Entertainment law turned out to be less about entertainment and more about reviewing documents. My favorite professor pointed out that I already had an economics degree and that I loved her trust and estates class, which was true. I also love meeting people and problem-solving. Trust and estates is one of the most personable areas of the law, so that’s where I focused. I practiced law for a decade and discovered it was partially about people, but it was also a lot about generating forms. So, I moved into financial services where it’s much more about the human side of planning, and my practice expanded beyond estate planning to include taxes.

My world has really come full circle, combining my arts background with taxes, estate planning, and economics, helping advisors deliver on the personal planning side for their clients. Now I spend my time educating advisors on taxes and planning in a way that I hope is engaging and entertaining. Shockingly, a lot of people don’t find taxes to be entertaining, but I think we can all agree that they’re an important part of our clients’ overall investment outcomes.

All investors should minimize taxes due on their investments. Technology has also made that easier.

Q: What is tax-aware investing, and what is tax alpha?

A: Tax-aware investing is really about making a series of small changes to asset location and to investment strategies that allow investors to keep more of what they earn after paying income tax. That might be a tiny change like switching from a mutual fund to an exchange-traded fund (ETF) in a taxable account, because ETFs are generally more tax-efficient. Or it could mean holding high-turnover strategies and other tax-inefficient assets in tax-deferred accounts while keeping stocks that generate qualified dividends, municipal bonds, and other tax-efficient assets in your taxable accounts. It also means taking advantage of tax-loss harvesting throughout the year instead of waiting until December, which has typically been a very good month for the market. Tweaks like that can make a difference over time. We call it tax alpha.

Q: What do investors and advisors misunderstand about tax-aware investing?

A: A lot of people think tax-smart investing is only for high-net-worth or even ultra-high-net-worth investors and that it’s out of reach for other segments. But all investors should minimize taxes due on their investments. Technology has also made that easier. Certain investment options that used to be available only for ultra-high-net-worth investors are now more broadly accessible.

Take separately managed accounts (SMAs), for instance. They were created specifically for family offices. But with technology and automation, the benefits of SMAs are now broadly available to many investors. Investors can customize their holdings and control the timing of capital gains while systematically harvesting losses. This creates the potential to apply a tax overlay at the SMA or portfolio level. Advances in technology now make this approach scalable and cost-effective.

Investors file income tax seasonally, but they should be planning for taxes on a year-round basis. Once tax season is here, there’s very little that can be done to help clients reduce their taxes.

Q: Market volatility could be with us for a while. How should investors think about it from a tax perspective?

A: Market volatility actually offers a lot of opportunity, even beyond tax-loss harvesting. First, it provides buying opportunities, and some of these are opportunities we haven’t talked about in years because of high valuations. Many advisors talk with clients about Net Unrealized Appreciation (NUA), which is a tax strategy that may apply to company stock held inside a 401(k). In simple terms, NUA allows investors, under certain conditions, to pay ordinary income tax only on the original cost of the shares, while any growth above that cost can later be taxed at potentially lower capital gains rates. There’s also a related, but less commonly discussed concept called Net Unrealized Depreciation (NUD). NUD refers to situations where the value of company stock has declined below the original purchase price. In these cases, it may make sense to sell those shares while the price is lower. By doing that, investors may be able to reset (or lower) their cost basis in the stock. If the value of the shares later recovers and they decide to use an NUA strategy in the future, the portion subject to ordinary income tax could be smaller, which may improve the overall tax outcome. In our view, any advisor who discusses NUA with clients may also want to consider NUD as part of the broader conversation, particularly when company stock is held in a retirement plan and valuations have declined.

Also from an estate planning perspective, lower valuations present a great opportunity to do planning. Of course, with gifting you have carryover basis, so you want to be careful about the asset types you’re planning with. But if you’re expecting to have a large federally taxable estate, there can be big benefits to making certain gifts while valuations are low.

Q: What would you like to see advisors starting to do now that tax season has ended to help investors prepare for next year?

A: I would love for advisors to stop thinking of taxes as a seasonal event. Investors file income tax seasonally, but they should be planning for taxes on a year-round basis. Once tax season is here, there’s very little that can be done to help clients reduce their taxes.

From a best practice perspective, advisors should discuss tax-related issues with clients every single time they talk. Maybe one month it’s about the client’s incentive compensation. The next month could be about systematic tax-loss harvesting, estate planning, or charitable giving. The key is making sure you’re having these conversations early enough in the year so they can take action well before tax season.

Q: Both ETFs and SMAs offer tax advantages, but through different structures. How do their approaches to tax efficiency differ?

A: Generally, ETFs are inherently tax-efficient because of their structure. The in-kind creation and redemption process* allows the fund to offload low-cost-basis securities without triggering capital gains, so investors typically only realize taxes when they sell their shares. That makes ETFs a very clean, low-maintenance option from a tax perspective.

SMAs, on the other hand, offer a different kind of advantage. Instead of built-in tax efficiency, they provide tax flexibility. Because the investor owns the underlying securities directly, managers can implement strategies like tax-loss harvesting, customize portfolios for individual tax situations, and manage gains more deliberately.

So, in short: ETFs are generally tax-efficient due to their structure, while SMAs derive their tax efficiency through active, ongoing tax management at the security level. The right choice really depends on the investor—ETFs work well for broad, low-cost exposure, while SMAs are compelling for those seeking customization and tax optimization.

*The in-kind ETF creation/redemption process is the mechanism by which authorized participants (APs) exchange a basket of underlying securities (instead of cash) for ETF shares (creation) or exchange ETF shares for the underlying securities (redemption).

Carefully consider a fund’s investment objectives, risks, charges, and expenses before investing. For a current prospectus and, if available, a summary prospectus, containing this and other information, visit allspringglobal.com. Read it carefully before investing.

Allspring ETFs are not available for distribution outside of the United States.

Allspring Global Investments does not provide accounting, legal, or tax advice or investment recommendations. Any tax or legal information in this document is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation.

Systematic tax-loss harvesting is a year-round approach to harvesting losses in portfolios by selling certain investments at a loss so that losses can be used to offset gains on the sale of other investments, thereby reducing capital gains tax owed. It aims to capture losses while maintaining a portfolio’s risk profile and relevant diversification parameters. The thresholds for and frequency of systematic tax-loss harvesting depend on market conditions and other factors.

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