SMA Strategies for High-Income Families: Tax-Loss Harvesting, RSU Concentration and Transitions

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

The SMA strategies that do real work for a high-income W-2 family are three: direct indexing with tax-loss harvesting, building the portfolio around a concentrated employer stock position, and moving old holdings into the account without a large tax bill. A separately managed account (SMA) is an account in your name where a manager buys the individual stocks or bonds directly, instead of selling you shares of a pooled fund. Because you own each position, the manager can sell specific losers for tax purposes, leave out your employer’s stock, and work around the shares you already hold.

For a California or Washington household earning $750,000 to $3 million, most of the value comes from taxes and concentration, not from picking better stocks. If an SMA is sold to you mainly on past performance, ask harder questions.

How an SMA differs from an index fund or ETF

In a mutual fund or ETF, you own shares of the fund. Gains and losses inside the fund stay inside it. In an SMA, you own every underlying position, each with its own purchase price (cost basis). That one difference creates the three strategies below.

Strategy 1: Direct indexing with tax-loss harvesting

A direct-indexed SMA holds most of the stocks in an index, such as a large-company US index, so it behaves much like an index fund. In any year, some of those stocks fall even when the index rises. The manager sells the losers, books the loss, and buys a similar (but not substantially identical) stock so the portfolio still tracks the index.

Those realized losses first offset your capital gains. If losses exceed gains, up to $3,000 a year ($1,500 married filing separately) can offset ordinary income, and the rest carries forward to later years (IRS Topic 409). For a family that sells vested RSUs, exercises options, or rebalances every year, a steady supply of harvested losses has real use.

Two things to keep in mind. First, harvesting is mostly a deferral. Each harvested loss lowers the cost basis of the replacement stock, so the gain shows up later when you sell. Second, the benefit is largest in the first few years. As the portfolio rises, fewer positions sit below their purchase price, and harvesting slows down unless you add new cash.

Strategy 2: Building around your RSUs and employer stock

Many families we work with hold a large block of one company: Apple, Amazon, Gilead, Genentech, or a pre-IPO employer. Their paychecks, bonuses and unvested RSUs already depend on that company. A broad index fund adds even more of it, because large employers are often large index holdings.

An SMA can exclude your employer, and if you choose, its whole sector. The rest of the portfolio then works as a counterweight instead of a second bet on the same outcome. The harvested losses from Strategy 1 can also be used to sell down the concentrated shares a little each year with a smaller tax bill.

Watch the wash sale rule here. If you sell employer shares at a loss and acquire substantially identical shares within 30 days before or after the sale, the loss is disallowed and added to the basis of the new shares (IRS Publication 550). An RSU vest or an ESPP purchase is an acquisition of shares, so selling employer stock at a loss near a vest date or ESPP purchase date can trigger the rule. A purchase inside your IRA or Roth IRA can also disallow the loss, and in that case the basis is not restored (Rev. Rul. 2008-5). Your SMA manager can only see the accounts you tell them about, so share your vesting and ESPP calendar.

Strategy 3: Moving old holdings in without a large tax bill

Most families arrive with a brokerage account full of appreciated funds and stocks. Selling all of it at once to “start clean” can create a large gain in a single year. An SMA can accept those positions as they are, keep the ones that fit the target index, and sell the rest gradually, using harvested losses and a yearly gain budget you set. The trade-off is tracking error: for a while, the portfolio will not look exactly like the index.

Two smaller uses also come up. A values screen can leave out industries the family does not want to own. And a fixed income SMA can hold individual bonds, including municipal bonds, whose interest is generally exempt from federal income tax (IRS Publication 550). Confirm state treatment with your tax preparer before choosing bonds for that reason.

Worked example: a $1.2 million household in California versus Washington

Assumptions (illustrative): married filing jointly, $1.2 million of W-2 income including RSUs, about $1.15 million of taxable income. They sell $800,000 of shares at RSU vest (so very little gain) and put the cash into a direct-indexed SMA that excludes the employer’s stock. In a choppy year, the manager harvests $60,000 of losses. They use those losses to sell $60,000 of gains on older employer shares held more than a year.

California taxes capital gains as ordinary income, with no lower rate for long-term gains (FTB), so harvested losses are worth more to a California family. A Washington family pays no state income tax on wages in 2026, but owes Washington’s 7% capital gains tax on long-term gains above the standard deduction, and 9.9% on taxable gains above $1 million (WA DOR; tiered rates notice). If that same family sold $1 million of employer stock in one year, the harvested losses could also reduce the Washington bill. Washington has also enacted a 9.9% income tax on AGI over $1 million starting in 2028 (WA DOR), so the gap between the two states may narrow for high earners.

Now compare that $21,660 to the cost. If the SMA and advice together cost, say, 0.30% a year more than an index fund on $800,000, that is $2,400 a year. In the early years the math is easy. By year eight or ten, when harvesting has slowed, the question is whether the employer exclusion and the gradual sell-down still justify the fee.

How to judge an SMA, including “best performing” claims

People searching for the best performing separately managed accounts usually see pre-tax returns. For this reader, that is the wrong number. Ask for these instead:

1. Total cost in dollars per year, including the manager fee, any platform or wrap fee, and the adviser’s fee on top.
2. After-tax return versus the index, with the harvested losses shown separately from the investment return.
3. Tracking error: how far the portfolio has drifted from the index it claims to follow.
4. Exit terms: can you move the individual stocks to another custodian in kind, or do you have to sell?
5. Who coordinates wash sales across your 401(k), IRAs, your spouse’s accounts, RSU vests and ESPP purchases.

A registered adviser must describe its fees and how it is paid in its Form ADV brochure, which you can look up on the SEC’s Investment Adviser Public Disclosure site.

Common mistakes

• Opening an SMA with a small balance where a low-cost index fund would do the same job for less.
• Treating harvested losses as permanent savings rather than deferred tax.
• Excluding the employer’s stock in the SMA while holding a broad index fund elsewhere that buys it back.
• Selling employer shares at a loss in the weeks around an RSU vest or ESPP purchase.
• Paying an advisory fee and an SMA fee and never adding them up as one number.

What to write down for your kids

Your children will not inherit a list of tickers that means anything to them. They will inherit an account full of individual stocks with low cost basis and no explanation. A one-page Decision Memo helps: why you chose an SMA, why the employer stock is excluded, what yearly gain budget you set, and when you would switch back to simple index funds. As Kevin puts it, “Your kids don’t need to inherit your portfolio. They need to inherit your decision-making process.”

For younger children, the accounts in their names (UTMA, 529) are usually too small for an SMA, and the kiddie tax applies to a child’s unearned income over $2,700 at the parents’ rate for 2026. Read UTMA withdrawal tax rules before moving appreciated stock into a custodial account.

FAQ

Is an SMA worth it for a family with $500,000 to invest?

It can be, if most of that money is new cash, you have regular capital gains from RSU or option sales to offset, and the all-in fee stays close to an index fund. If the money is already in low-cost index funds with large gains and you rarely sell, the harvesting benefit is often small. Run the numbers in dollars for your situation before switching.

Do I pay tax on an SMA if I do not sell anything?

You still owe tax on dividends each year, and the manager’s trades realize gains and losses inside the account even when you take nothing out. See how a brokerage account is taxed if you do not sell for the basics. A well-run equity SMA aims to realize more losses than gains in the early years.

Can an SMA hold my unvested RSUs?

No. Unvested RSUs are a promise from your employer, not shares you own, so they stay in your equity plan account. What an SMA can do is account for them: it can exclude your employer’s stock, knowing more shares will arrive at each vest, and it can avoid selling those shares at a loss near vest dates.

Next step

List every account that holds your employer’s stock or a broad US index fund, with its current value and cost basis, plus your next 12 months of RSU vest and ESPP purchase dates. That one page shows whether an SMA would mostly harvest losses, mostly fix concentration, or not add much. If you want help reading it, our investment and risk management and tax management teams at Age Five Family Office™ review this as part of the Tax & Wealth Assessment, and our family governance work covers the Decision Memo.

This is general education, and the right move depends on the 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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