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After-tax Asset Allocation: An Interview with Dr. William Reichenstein

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Wealth management requires knowledge of finance on all fronts. From markets to investment strategy to savings plans, managing one’s money takes a lot of work. Whether you’re an investment banker or a union worker, savings plans are essential to allocate your assets with the promise of financial fitness for the long haul.

We sat down with Dr. William Reichenstein, CFA, to gain his insight on the complexity of asset allocation and investment strategy. Dr. Reichenstein, a professor of finance at Baylor University with a repertoire of scholarly accolades, is an expert on financial management. He lectures around the US on a variety of finance-related subjects, and was kind enough to share his concept of after-tax asset allocation with us nerds.

The Concept of Asset Allocation

Asset allocation is a tricky subject because there are so many investment options. No matter where your assets lie in the investment game, it’s crucial to have a savings plan, and the right one at that. When deciding on an optimal after-tax savings plan, you should ask yourself: “do I want to pay now or at retirement?” according to Dr. Reichenstein. The answer, he says, is “I want to pay at the lowest rate.” Below we’ve highlighted two common savings plans and their implications to determine the lowest rate for our audience.

Savings Plans 101


Tax-deferred Accounts (401k) Tax-exempt Accounts (Roth 401k)
Tax break upfront No immediate tax deduction
Principal deducted at withdrawal Tax break at withdrawal
“Front-loaded” “Back-loaded”


When dealing with tax-deferred accounts (TDA), investing in assets is like a partnership between you and the government. TDA’s are also called “front-loaded” because you receive the tax break at the beginning of the investment, but have to pay principal to the government at withdrawal. The other common savings plan is a tax-exempt account (TEA), in which you receive no tax break upon investing, but taxes on your funds are exempt upon withdrawal – hence the term, “back-loaded”.

Choosing the Right Savings Vehicle: Real Talk

Generally, young professionals face the lowest tax brackets early on in their careers, under the assumption that their income will increase in the future. This being said, a tax-exempt account is more fitting than a tax-deferred one. For example, for the first $4,000 of many 401k accounts, your contribution will be matched. Thus it is essential to capitalize on the most efficient options.

As a rule of thumb, if your tax bracket is going to increase as you approach retirement, you should invest your funds in a tax-exempt account (Roth). This supports the accepted fact that a dollar of pre-tax funds in a TDA account is less valuable than the same amount of after-tax funds held in a TEA. If your tax bracket is going to increase as you approach retirement, you will save more by investing in a tax-exempt account.

However, it is crucial to determine your tax bracket, company options, and what your spending habits will be to determine the most applicable savings plan. If you are looking to save some money early on in your career, a Roth arrangement is most likely the way to go. But if you’re looking to make a big purchase with your recent paycheck or pay off hefty loans, you should probably stick to the traditional 401k.

Example 1: Your tax bracket is currently 10% and your retirement tax bracket is 25%.

401k: Investing $10,000 today would yield only $7,500 upon withdrawal (25% tax on principal)

Roth 401k: Investing $10,000 today would yield $9,000 upon withdrawal (10% tax on deposit)

Example 2: Your tax bracket is currently 25% and your retirement tax bracket is 12%.

401k: Investing a fund of $10,000 today, you will receive $8,800 upon withdrawal (12% tax on principal)

Roth 401k: Investing a fund of $10,000 today, you will receive $7,500 upon withdrawal (25% tax on deposit)

A New Approach to Asset Allocation

Dr. Reichenstein’s approach to efficient asset allocation values all assets in after-tax dollars. His reasoning is simple – you cannot compare various securities in different units or values if you want to be able to make the best decision. He refers to this investment strategy as an apples-to-apples approach.

The simple principle, according to Dr. Reichenstein, is “each dollar of pre-tax funds in a tax-deferred account is worth less than each dollar of funds in an after-tax account.” Based on this principle, if you manage your investments correctly, you can take advantage of savings plans and benefit from choosing one over the other. It all seems so simple, but variables play a key role in determining which savings plan is right for you.

Dr. Reichenstein offered a comparison to the world of investments – in an efficient market there is so much competition that undervalued assets do not exist. But savings plans are different because there is an obvious undervalued security when the value of all funds is translated into the form of after-tax dollars as a single monetary unit.

Shifting Demographics and After-tax Assets

Theresa Yarosh, a financial advisor at Macro Wealth Management, LLC, says: “To believe that we will retire in a lower tax bracket is sheer folly.” She believes the 77 million baby boomers approaching retirement will put a strain on our tax system, our entitlement programs and our monetary markets. Yarosh believes a tremendous uncertainty with regard to tax rates will unfold due to this seismic shift in demographics.

Yarosh sums it up in saying; “a tax-deferred savings plan opens the door for an unpredictable future. At least with after-tax or tax-exempt savings we know we will not be taxed and a tax-free dollar is more valuable than a taxable dollar.” Thus you can reduce the uncertainty associated with volatile tax brackets by investing in a tax-exempt savings account, under the impression that your retirement tax bracket will be higher than your current one.

Final Word

A dollar today is worth more than a dollar in the future – this universal mantra holds true in every field of finance. And so, investing in your savings plan today is worth more than investing later in the eyes of many financial experts. Overall, after-tax asset allocation is all about knowing what’s available so you can save the most money by capitalizing on the lowest rates.