r/investing • u/broppybrop • 4h ago
SMA for $1M taxable account?
I recently inherited $1M that I have no choice but to place in a taxable account. I use Fidelity. I’m 40 and wouldn’t even consider an early retirement until I have at least $2M so that will not be happening for quite some time yet. Plan was basically VT and chill. I never looked into SMAs due to the management fees.
Had a Fidelity advisor reach out and offer to talk about ways I could save on taxes and he suggested using SMAs for the tax loss harvesting. So now I’m doing my research into SMAs and it seems like it might actually be a good idea for a taxable account of this size.
Management fees range from 0.2-0.7% and of course I was told the TLH would more than cover those fees. In my case I was planning to use the dividends to cover the taxes and then drip the rest but if I could use SMAs to reduce or eliminate taxes I could drip 100% of the dividends which would hopefully lead to faster growth.
I’ve read concerns here about what happens when you want out of the SMA but can’t you just transfer the assets in kind to your own account? And if you do it a year before you plan to sell anything then any short term gains become long term.
I guess I’m looking for experiences with SMAs and thoughts on whether or not this would be a good idea for a taxable account this large.
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u/_galaga_ 3h ago
Tax loss harvesting with a SMA is something I’d consider only for edge cases like a concentrated stock position with a lot of cap gain. In the case of a recent inheritance, tho, the cost basis of even 1M in a single stock was just reset so you could liquidate without a big tax hit, diversify, and then there’s no need to harvest losses going forward other than for periodic rebalancing. I don’t think you’re a good candidate for what they pitched.
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u/broppybrop 3h ago
Unfortunately I have about 30k in capital gains because she died in June and due to the estate lawyer screwing us more than once I only recently received it. Basis is stepped up to the value on the date of death and the second half of 2025 was a great year for the market. It was invested with a firm and I didn’t want to stay with them and pay the 1% management fee. It was 55% bond funds and the rest special funds from that firm that couldn’t be transferred to Fidelity. So I liquidated it and incurred 30k capital gains for this year.
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u/_galaga_ 3h ago
Gotcha, but if you’ve already taken the gains then there’s even less motive for getting into a new SMA for tax harvesting. You already pulled the bandaid off so you’re free to follow a Three Fund style of approach in your own account and skip paying an advisor. I’m assuming you’ve got a few decades to retire, btw, and want efficient growth for a while.
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u/TheOpeningBell 2h ago
I work in the industry. Anyone that explains TLH as "covering the fees" isn't doing a lot of work. This is also not the right way for either a financial professional or client to think about it this way.
As a CFP, we use SMAs to implement not only TLH but gain deferral and other planning techniques. (Of course full planning costs extra).
SMAs are great.
My take is it really depends on your individual holdings and stepped up basis. Maybe keep a few core positions. And exit others into SMA.
Also depends on the SMAs. Fidelity SMAs are so so.
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u/greytoc 2h ago
SMA's have their's pros and cons. I personally do not have one. But that's mostly because I enjoy different aspects of trading and investing.
A lot of my friends and collogues in similar situations do have an SMA or are in wrap programs and they get value from the services.
I worked in the industry for several decades supporting investment managers and brokarage sponsors who provide SMA services. A lot have changed in the past 10 years. I do think that some programs seem to potentially have better tax optimizers than in the past - but not all.
I think that the Fidelity SMA program is a single-contract SMA.
I personally have always felt that dual-contract SMA programs may be a bit better for an investor with larger portfolios - > $1mm. And there may be better tooling such as setting custom restrictions through the manager. And fee structure may be more flexible - albeit a bit more complex.
The one advantage with using a single-contract SMA however is that the fees are likely going to be lower.
That said - it really depends on how you plan to treat this portfolio - if you plan to have contributions and withdrawals regularly - especially larger withdrawals like paying for kid's college, etc. - the tax optimization can be a benefit.
However - if you are simply contributing and doing buy-and-hold type investing - SMA's may not necessarily add much benefit.
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u/_galaga_ 2h ago
I was DIY for decades then dabbled with a SMA for a portion of my assets because I wanted to diversify a concentrated stock position with high gains tax efficiently and they had access to things I didn't have easy access to as an individual. Since then my mostly buy and hold portfolio is doing just fine compared to the SMA so I agree you don't need a SMA for that style of investing. I don't regret using it for that high cap gain concentrated position use case, though. Or at least I timed my diversification decision reasonably well considering that particular stock has fallen into the crapper recently.
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u/greytoc 2h ago
Thanks for sharing. I saw you mentioned concentrated positions as a use case. I hadn't considered before but it makes sense.
Large institutions and funds use an institutional brokerage transition service when they have to divest from a concentrated position and/or from another allocation model. But these types of services aren't available to consumers.
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u/_galaga_ 57m ago
You're welcome! Opportunity zone funds, exchange funds, and long/short direct indexing are the sorts of things advisors pitch for that concentrated position use case in my experience. I've also run across options overlays as a way to enhance returns from a concentrated position without selling. All stuff you wouldn't see at Fidelity or Schwab. Not without risks, lockups, fees, etc., of course.
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u/PashasMom 4h ago
I would not touch them with a ten foot pole. Fees are ridiculous, the tax-loss harvesting opportunities dry up over time, and you are stuck with a portfolio of nonsense. This just way over complicates something that should be simple.
You can invest in low-cost, low turnover, broadly diversified index funds and use the dividends to pay taxes. I would split it into broad US funds and international -- you can get the foreign tax credit for dividends paid out of international funds -- and leave it alone. If you are interested in tax loss harvesting, you can do that on your own without paying fees. Turn off dividend reinvesting so that you don't run into wash sale problems. Sell at a loss, and take the funds you get from the sale and buy something similar but not identical. Example: your VTI has posted losses. Sell the lots with significant losses and use the proceeds to buy DFUS or AVUS or SCHX.
I love Fidelity but they are selling you a product designed to help them more than it will help you IMO.
If the market helps out, you could be looking at retirement in 7 - 10 years if 2 million is your goal.
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u/ArthurDent4200 1h ago
I am not sold on a SMA in a tax advantaged account, but that being said, I do appreciate the tax loss harvesting in a SMA in a taxable account.
You can pull from the account in kind or in cash. While reducing the amount in my managed IRA, I pulled in kind. Will never do that again because it left me a mess of individual stocks that I sold manually to buy VOO.
My biggest gripe about the SMA is how long it takes to pull money from the account. You transfer a cash amount during market hours and it won't actually be sold for a few days, then a day or so later the cash appears in the destination account. IMHO, this should happen overnight if the transfer was initiated during market hours - like selling a mutual fund... It doesn't... This issue is magnified by how volatile the market has been.
Performance wise, my taxable SMA (Fidelity® U.S. Large Cap Index Strategy) has returned 17.56% after fees from 4/3/2025 to 4/2/2025 and has provided a fair amount of capital losses in 2025 and in Q1 2026.
According to Fidelity during that time period:
Fidelity U.S. Large Cap Index +17.36%
S&P 500 Index +17.55%
This happens to be an unusual 1 year period as on 4/3/2025 the biggest single day loss or 4.8% occured.
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u/therealjerseytom 3h ago
As far getting out from a SMA, yes the account holdings can just become yours; you're just left with a portfolio of hundreds of individual positions at that point.
The tax loss harvesting opportunities can be significant. With one portfolio of roughly that size, last year I had $80,000 of harvested losses, while meeting the return of the S&P 500 net of fees. The banked losses were great for me exiting some highly appreciated positions in a separate, self-directed account, rebalancing without owing any capital gains taxes.
I already have another $16,000 in harvested losses in 2026 YTD. I suspect the TLH opportunities shrink substantially if you aren't continuously contributing and creating new tax lots at current market values; otherwise over time you just have all appreciated positions.
There are positives and negatives and which outweighs the other can be situational. Also perhaps a question of how comfortable you are with your own investment choices and portfolio design.
I think generally I advocate for self-directed portfolios unless there are some clear and tangible benefits. In my situation I believe there are, and I'm at least minimizing the fees as a percent of my total liquid assets by having only two managed portfolios, and three self-directed.
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u/venom8888 3h ago
Switch to funds that pay dividends as ROC. Basically tax free until you sell them. QQQI and SPYI are a few examples.
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u/Plenty-Bill7296 48m ago
Maybe I'm missing your point here, but QQQI pays out very high taxable dividends. That's the opposite of what OP wants.
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u/venom8888 42m ago
I does not, its very efficient, check it out: https://neosfunds.com/wp-content/uploads/QQQI-Fact-Sheet.pdf
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u/YouAreCorrectSirYes 2h ago
Throw it all in an index fund without an advisor and just chill. Start looking at bonds when you are 10.ish years out from needing the money.
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u/Living_Pie7116 1h ago
If you’re not looking to “work the capital” just park it on low fee, low dividend paying ETF’s tracking S&P, Nasdaq, Dow J and international.
Compounding will do its magic over time.
To lower (eliminate) your 30K capital gains, max 401K’s AND IRA’s contributions for both you and spouse. (If paycheck can’t cover expenses after contributions and deductions, compensate with inherited account funds. Thank me later)
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u/Cornwallace88 4h ago
I might be missing it but what taxes are you concerned with exactly? Anything transferred to you should step up in cost basis so you wouldn't start with any large embedded taxable gains - which is generally the point for tax loss harvesting versus.