04/24/2014 08:24 pm ET Updated Jun 24, 2014

American Wealth: An IRS Exposé

This article was written by Simon Moore, of FutureAdvisor, for bill and account management service

An old game of cat-and-mouse plays out between the rich and the tax man, a game that has exploded in recent years with the scandals at Swiss global financial services companies UBS and Credit Suisse. Leona Helmsley, nicknamed the "Queen of Mean" and convicted of federal tax evasion in in 1989, summed it up when she said, "Only the little people pay taxes." The prison term that followed proved her wrong.

After so many stories about how the wealthy hide their assets, it's refreshing to find that we actually know exactly where many rich Americans keep them. And the data comes, as you might expect, from the Internal Revenue Service (IRS).

Government datasets on the average investments of wealthy Americans let us analyze their asset allocations. We may not know how they got rich, but we can see what they did once they arrived. (The information below covers Americans with more than $20 million in 2012, the most recent data available from the agency.)

Rich Americans Hold Stocks...

Almost two-thirds of the wealth those Americans hold is in stocks or stock-like investments. Not surprising, given that stocks have performed so well over the long-term.

...Balanced By Real Estate And Bonds

The wealthy also diversify, with 10 percent of their assets in real estate and 11 percent in bonds. The real estate serves as a useful hedge against unexpected inflation, which can hurt stocks. Bonds can keep delivering income even if there's a recession and stocks' earning power declines.

Holding Municipal Bonds

Wealthy Americans also hold a disproportionate amount of their bonds in state and local government bonds. Many of these state and local bonds are municipal bonds, which pay a lower rate of interest but do so tax free. In high tax brackets, where much of the yield on other bonds would be lost to tax, this is a huge benefit.

Too Much Cash

For all their wealth, the richest Americans hold an awful lot of cash, on average 6 percent of their portfolio. Holding some cash is helpful for liquidity, but 6 percent would be too high for most investors, given that cash is eroded by inflation year after year.

Tax-Loss Harvesting

Most wealthy Americans rely more heavily on capital gains than a paycheck as their source of income. This is a case where tax-loss harvesting works wonders. Capital gains tax is paid on investments that rise in value. Holding certain investments for over a year can reduce it, and tax-loss harvesting, where investments are sold at their lows to realize losses, can offset the tax entirely. The loss-making investment can't be bought back within 30 days, but a different investment can be purchased with the funds.

High Rates of Saving

The other thing that's clear about rich Americans is their high savings rate and the absence of debt. These are much easier once you have $20 million, of course, but they may well be the habits that led to wealth accumulation in the first place.

Data released recently by the Bureau of Labor Statistics shows that the richest 20 percent of Americans spend a greater portion of their income on education than the bottom quintile, which could be construed as an investment in their children's intellectual and social capital.

What to Do Next

It's easy for your to invest in the same way as the richest Americans do. Exchange Traded Funds (ETFs) let you to create portfolios similar to what they would hold, but at a very low cost.

Vanguard offers funds enabling you to track the stock, bond and real estate markets for fees as low as 0.05 percent a year. You can trade such investments through a brokerage account, just as you would stocks.

Simon Moore CFA, MBA, is a regular contributor to The Manilla Folder at, the leading, free and secure service that lets you manage and share your bills and accounts in one place online and via mobile apps. Simon is chief investment officer at FutureAdvisor, an award-winning investment manager that helps you analyze and improve your retirement-savings choices. It takes just a few minutes. See your free analysis at

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