Anatoly Iofe is founder and CEO of IceBridge Financial Group, a global multifamily office based in Boca Raton, Florida.
Most wealthy investors watch markets closely. A sudden drop sparks worry; a rebound brings relief. But there’s another force that doesn’t make headlines and still eats away at wealth year after year.
That force is tax drag, and over time, it can do more damage than any single bear market.
What Tax Drag Really Is
Every dividend, every interest payment, every realized gain comes with a tax bill. Those payments don’t just cost money once—they shrink the base you compound on. Over years, that small leak compounds into a surprisingly large shortfall.
I’ve seen this firsthand when reviewing client portfolios. On paper, everything looked like it was compounding at market rates. But once the effect of annual taxes was factored in, the actual growth was far less than expected. What surprised them most wasn’t a market downturn, but how much wealth had quietly leaked away over time.
Why It Gets Overlooked
Tax drag doesn’t grab attention. Markets crash loudly; taxes drain quietly. Many people assume it’s just the cost of investing. And because a single year’s drag doesn’t look terrible, the long-term impact gets ignored—until the gap becomes impossible to miss.
Ways To Reduce Tax Drag
There isn’t a single fix, but below are a few patterns that can help.
1. Put assets in the right accounts.
A common mistake I see people make is holding the wrong investments in the wrong type of account. For example, some clients keep income-heavy holdings in taxable accounts, which generate significant annual tax bills, while leaving tax-efficient investments in retirement accounts.
It’s not about moving retirement accounts themselves—it’s about being intentional with what goes where. By holding tax-inefficient assets in tax-deferred accounts and keeping more tax-friendly assets in taxable accounts, you can meaningfully reduce drag without changing the overall mix of what you own.
2. Use wrappers to contain taxes.
The idea is simple: Let returns grow without leaking out to taxes each year. For some clients, that means making better use of retirement accounts or Roth structures. For others, it means using advanced tools.
For more complex situations, some clients use specialized insurance-based structures that allow hedge funds or private equity to grow without annual tax leakage. When they’re designed well, these vehicles can be powerful. When they’re misused—say, underfunded or loaded with unnecessary costs—they can end up tying up capital and creating frustration. The difference comes down to whether the structure truly fits your needs.
3. Plan across borders.
Clients with ties to multiple countries face another layer of complexity. I’ve worked with people who created large, unnecessary tax bills by realizing gains before changing residency. With better sequencing, the outcome could have been completely different. The order of decisions—where income lands, which treaty applies and when recognition occurs—matters as much as the investments themselves.
4. Remember timing matters.
Tax-loss harvesting, charitable giving or carefully timing liquidity events can reduce drag in meaningful ways. I’ve seen clients avoid substantial tax bills by giving appreciated assets directly to charitable vehicles, turning what could have been a painful tax event into a strategic move that also met their philanthropic goals.
Structure Matters More Than Products
The biggest mistake I see people make is chasing new products while ignoring structure. Clients often debate which investment might add an extra point of return, while overlooking the steady leak of taxes that quietly costs them more.
The wealthiest clients flip the order: They build a structure that minimizes drag first, then decide what investments to place inside it. That one shift is often the difference between just staying market-rich and building lasting wealth.
Why It Matters Now
The tax landscape is changing. Estate and gift exemptions are set to shift, capital gains rules are constantly revisited and global reporting keeps tightening. The headwinds of tax drag aren’t fading—they’re growing stronger.
Final Thoughts
Markets will always swing. Taxes don’t. They arrive every year, guaranteed, and compound against you unless managed.
The people who build real legacies ask a different question—not “What’s my return?” but “What’s my after-tax return, and how do I keep more of it working for me?”
That’s the difference between wealth that fluctuates with the market and wealth that endures.
The information provided here is not investment, tax, legal or financial advice. Consult with a licensed legal or tax professional for advice concerning your specific situation. www.ifg.one/disclaimers
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