Benefits of Separately Managed Accounts for High-Income Families

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

A separately managed account (SMA) is a portfolio of individual stocks or bonds that you own directly in your own brokerage account, run by a professional manager. The main benefits are tax control (the manager can sell individual losers to harvest losses), the ability to work around a concentrated position such as employer RSUs, and customization that a mutual fund or ETF cannot offer. For a high-income W-2 family in California or Washington with a large taxable account, those benefits can be worth more than the extra cost. For a family whose savings sit mostly in a 401(k) or IRA, they usually are not.

What you actually own in a separately managed account

In a mutual fund or ETF you own shares of a pooled fund. The fund owns the stocks. In an SMA you own the stocks themselves, held in an account in your name at your custodian. The manager has trading authority, but every position, cost basis and trade shows up on your statement.

That direct ownership is the source of every real advantage. Because each stock has its own cost basis, the manager can sell the ones trading below what you paid, realize the loss, and buy something similar so the portfolio stays on target. A fund cannot pass its losses through to you. A common modern version is direct indexing: an SMA that tracks an index such as the S&P 500 by holding most of its stocks directly instead of buying one index fund.

The benefits that matter at a $750k to $3M household income

• Tax-loss harvesting on individual stocks. In any given year, some stocks in a broad index fall even when the index rises. An SMA can harvest those losses. Losses first offset capital gains, then up to $3,000 a year of ordinary income, and any remainder carries forward to later years until it is used up (IRS Topic 409, IRS Publication 550).
• Diversifying out of RSUs without a big tax bill in one year. Harvested losses can be used to offset gains when you sell appreciated employer shares, so the family can reduce a concentrated Apple, Amazon, Gilead or Genentech position on a schedule.
• Excluding what you already own. If one spouse works at Apple, the SMA can hold the rest of the index and skip Apple, so your total exposure to the employer does not rise every time you invest new money. A fund cannot do this.
• Control over when gains are realized. You do not inherit capital gain distributions caused by other investors selling a fund. Gains happen when your manager sells your stocks, which you can plan around.
• Values screens. You can exclude specific companies or industries. This is a preference, not a tax benefit, and it adds tracking error.
• Transparency. You see every holding and trade, which makes it easier to coordinate with your CPA and with RSU vesting dates.

Worked example: a California family with Apple RSUs

Assumptions, for illustration only: married filing jointly, both W-2 earners, about $1.2M of taxable income in 2026, living in California. They hold $1.5M of Apple shares from past RSU vests (held over a year, large unrealized gains) and invest $1M of cash into a direct-indexed SMA that excludes Apple.

In a choppy year, the manager harvests $60,000 of losses on individual stocks while the portfolio still tracks the index. The family then sells enough Apple shares to realize $60,000 of long-term gain, and the two net to zero.

Two points keep this honest. First, harvesting is mostly a deferral: the replacement stocks have a lower cost basis, so more gain is due when they are sold later. The real value comes from reducing concentration risk now, from paying tax years later, and from basis step-up if positions are held for life. Second, harvesting is front-loaded. Most losses appear in the first few years after funding. As the portfolio rises, fewer positions sit below cost, unless new cash keeps flowing in, which RSU vests often provide.

California has no lower rate for capital gains, so every gain is taxed like wages (FTB). That is why harvesting tends to be worth more to California families than to almost anyone else.

How the numbers change in Washington

A Washington family has no state tax on wages in 2026, so the federal 23.8% still applies but the state layer is smaller. Washington taxes long-term capital gains at 7% above an annual standard deduction ($278,000 for 2025, the latest published), and at 9.9% on taxable gains above $1M (WA DOR). A family selling a large block of Amazon stock in one year can cross that deduction, and harvested losses help there too. Note also that Washington enacted a 9.9% income tax on AGI over $1M starting in 2028 (WA DOR), so families planning multi-year sales should run both versions.

Are separately managed accounts worth it? A decision checklist

An SMA tends to make sense when most of these are true:

1. You have a meaningful taxable brokerage account (not just 401(k), IRA or 529 money, where harvesting has no value).
2. You hold a concentrated, low-basis position, usually employer stock from RSUs or ESPP.
3. You are in high federal and state brackets, so each dollar of harvested loss can offset gain taxed at 23.8% federally (20% plus 3.8% NIIT at this income, 2026) plus state tax: 12.3% to 13.3% in California at $1M+ of taxable income (2025 schedule), or 7% to 9.9% in Washington on gains above its annual deduction.
4. You expect to keep adding cash, for example from regular RSU vests and bonuses.
5. The all-in cost (manager fee plus advisory fee) is clearly stated and modestly above what a plain index fund costs.

If your investable money is mostly in retirement accounts, or you already own broad index funds with large gains you never plan to sell, a low-cost ETF is usually the simpler and better answer.

Common mistakes with SMAs and direct indexing

• Triggering wash sales across accounts. A loss is disallowed if you buy a substantially identical security within 30 days before or after the sale, and that includes purchases in a spouse’s account or an IRA (IRS Publication 550). RSU vests and ESPP purchases of employer stock can collide with harvesting in that same stock, so tell the manager your vest calendar.
• Not telling the manager what you hold elsewhere. An SMA that excludes Apple helps only if the manager knows about your Apple shares, your 401(k) funds and your spouse’s account.
• Judging it by pre-tax return alone. Compare after-tax results and how much concentration you reduced, not just performance against the index.
• Paying two layers of fees without knowing it. Ask for one all-in number.
• Funding it with appreciated funds. Selling a low-basis fund to move into an SMA creates the gain you were trying to avoid. Many custodians can transfer existing stock positions in kind.

What to write down for your kids

Your children will not remember the harvesting. They may inherit the account. A one-page note explaining why you held the employer stock, how you decided to reduce it, and what rule you used for selling (for example, “never more than 15% of our net worth in one company”) can teach them more than the statements. This is the kind of reasoning a FamilyKnowledge® Library is built to capture. Conversations fade. Documentation compounds.

Questions families ask about SMAs

How is an SMA different from an ETF?

An ETF is one security that holds many stocks; you own the fund. An SMA holds the stocks themselves in your name. That lets the manager harvest losses stock by stock, exclude your employer, and avoid passing you gains from other investors. ETFs are cheaper and simpler, and they are already quite tax-efficient, so the SMA has to earn its extra cost through those specific features.

Can harvested losses offset RSU income?

Only up to $3,000 a year. The value of RSU shares at vest is W-2 wage income, and capital losses cannot offset wages beyond that $3,000 limit. Where losses help is the gain you realize later when you sell RSU shares that have grown since vesting. Unused losses carry forward to future years.

Does an SMA make sense inside an IRA or 401(k)?

Generally no. Gains and losses inside retirement accounts are not taxed or deductible, so tax-loss harvesting has no value there. A low-cost index fund usually does the same job for less. Keep SMAs for taxable money.

Next step

List your taxable accounts, your employer stock with its cost basis, and your next 12 months of vest dates on one page. That one page shows whether an SMA would have anything to work with. If you want help reading it, our investment and risk management and equity compensation pages explain how Age Five Family Office™ handles concentrated positions, and the tax management page covers how harvesting fits a family’s tax plan. Related reading: do you pay taxes on a brokerage account if you don’t sell, how to reduce MAGI, and UTMA withdrawal tax rules if you are investing for the kids.

This is general education, not individual advice. The right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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