there’s no real magic to creating taxefficient portfolios on the bond side favor municipal bonds especially if you’re in a higher tax bracket on the stock side broadmarket index mutual funds and exchangetraded funds generally do a good job of limiting the drag of taxable capital gains ditto for taxmanaged equity funds t rowe price has long been a morningstar favorite thanks to its sober management style and record of strong stewardship but the process of building a taxefficient t rowe portfolio highlights a few shortcomings in the firm’s lineup for taxconscious investors while t rowe’s municipalbond funds are topnotch it has fewer standout options to suit taxconscious equity investors the firm does field a lineup of basic equityindex offerings but their costs are higher than many rivals’ index funds and etfs for these three taxefficient bucket portfolios i employed a bucket approach to their structure each portfolio includes a cash component to cover a retiree’s nearterm expenses bucket 1 highquality bonds for intermediateterm spending bucket 2 and equities for longterm growth it’s worth noting however that i avoided some of the higherriskhigherincome fixedincome types that appeared in my other portfolios—for example highyield and emergingmarkets bonds because their income distributions are taxed at investors’ ordinary income tax rates they’re a better fit for taxsheltered accounts these investments have riskreward profiles that fall between equities and bonds so it’s reasonable to nudge up the taxefficient portfolios’ equity exposures to compensate for the fact that they’re missing here on the equity side i employed broadmarket index funds both us and international on the fixedincome side i eschewed bond funds with higher incomes and in turn higher tax costs instead i employed municipalbond funds—in this case from fidelity for the cash piece—bucket one—investors should shop around for the highest safe yield they can find how to use them retirees will want to be sure to “rightsize” the components of these portfolios based on their spending plans and other considerations if they’re prioritizing withdrawals from their taxable portfolios over other account types—in line with taxefficient withdrawalsequencing considerations—they may want a larger cash component than is outlined here i typically recommend that retirees hold six months’ to two years’ worth of planned expenditures in true cash instruments moreover retirees will want to take into account their own time horizons risk tolerance and investment goals when setting their allocations as with the other retiree bucket portfolios the asset allocations shown here assume that the retiree will spend all of his or her assets which may not be the case for those who would like to leave a bequest to loved ones or charity additionally retirees will also want to assess their own tax rates to determine whether they’re better off in municipal bonds which are included in the portfolios below or taxable bonds once the haircut of taxes is factored in investors in high tax brackets will want to investigate whether a municipal money market fund might not have a higher aftertax yield than a taxable money market fund or highyield savings account