High-income earners face a unique challenge: how to optimize returns on their cash reserves while
minimizing the tax burden. Traditional vehicles like certificates of deposit (CDs) and money market
funds have long been staples for cash management, but their interest income is taxed at ordinary
income rates—which can significantly reduce real returns for those in top tax brackets.
The High-Income Investor’s Cash Dilemma
Cash reserves are essential for financial security and flexibility.
However, high-income professionals often find themselves in tax brackets where as much as 37% of
interest income goes straight to federal taxes, not including state taxes that can push effective rates
even higher.
This creates a critical inefficiency: while seeking safety and liquidity, high earners inadvertently
subject themselves to maximum tax drag on their cash positions.
Enter Tax-Efficient Alternatives
Innovative financial products have emerged to address this specific challenge, with exchange-traded
funds (ETFs) and specialized interval funds leading the way. Three particular investment vehicles
worth examining are BOXX, BALT, and FORAX, each offering different approaches to optimizing the
cash and income portions of a high-income investor’s portfolio.
BOXX: Cash-Like Returns with Superior Tax Treatment
The BOXX Alpha Architect 13 Month Box ETF represents a tax-efficient option for high-income
investors seeking tax efficiency for their cash reserves. Here’s what makes it stand out:
Tax-Advantaged Structure: Unlike traditional cash investments where returns are taxed as ordinary income, BOXX is engineered to deliver returns qualifying for long-term capital gains treatment when held for over a year. For high-income earners, this can mean a federal tax rate of just 20% versus 37% or higher on ordinary income.
Tax Deferral Benefits: BOXX’s structure allows for tax deferral until shares are sold, enabling more efficient compounding compared to vehicles where interest is taxed annually regardless of whether you withdraw the funds.
Maintained Liquidity: Despite its tax advantages, BOXX maintains the liquidity characteristic of ETFs, trading daily on major exchanges and allowing investors to access their funds when needed.
Risk Profile: BOXX utilizes centrally cleared options and holds collateral to maintain a risk profile similar to short-term Treasury bills, providing peace of mind for the risk-averse investor.
BALT: For Those Seeking Growth with Protection
While not purely a cash alternative, the BALT Innovator Defined Wealth Shield ETF offers another
approach for high-income investors who want modest growth potential with downside protection:
Buffered Equity Exposure: BALT provides exposure to the S&P 500 while implementing a defined buffer against losses, offering a middle ground between cash investments and full equity exposure.
Participation in Market Gains: Unlike pure cash investments, BALT allows investors to participate in equity market gains (to a cap), which I believe has the potential to outpace inflation by a larger margin.
Standard ETF Tax Treatment: While not offering the specific tax advantages of BOXX, BALT still benefits from the general tax efficiency of ETFs compared to actively managed funds.
FORAX: Real Estate Income with QBI Deduction Benefits
Another option for high-income investors is the Forum Real Estate Income Fund (FORAX), an
interval fund that combines income generation with significant tax advantages:
High Monthly Yield: FORAX boasts a 7.11% annualized dividend yield (as of March 31, 2025), distributed monthly, providing steady income that many high earners seek.
QBI Deduction Eligibility: As a REIT (Real Estate Investment Trust), FORAX dividends qualify for the QBI (Qualified Business Income) deduction under Section 199A of the tax code. This allows eligible investors to deduct up to 20% of their qualified REIT dividends, potentially reducing the effective tax rate on these distributions.
For high-income individuals, this deduction can be particularly valuable:
- A taxpayer in the 37% federal tax bracket could potentially reduce their effective tax rate on FORAX dividends to 29.6% (37% minus 20% of 37%)
- For a $100,000 investment yielding 7.11% ($7,10 in annual dividends), the QBI deduction could save approximately $524 in federal taxes annually
- Unlike many other tax benefits, the QBI deduction for REIT dividends is not subject to phase-out at higher income levels, making it especially valuable for high earners
Professional Management: The fund combines expertise from Forum Capital Advisors and Nuveen to actively allocate between private and public real estate debt opportunities, providing diversification beyond traditional fixed income.
Interval Fund Structure: Unlike ETFs, interval funds offer liquidity through quarterly repurchase offers (typically 5-25% of outstanding shares), making them suitable for investors who don’t need immediate daily liquidity for their entire allocation.
Diversified Real Estate Debt Portfolio: FORAX invests in two main categories:
- Institutional CMBS (71%): Commercial mortgage-backed securities provide exposure to securitized commercial real estate loans
- Private Debt (29%): Direct loans and preferred equity positions in real estate projects
The fund’s real estate debt portfolio spans multiple sectors:
- Multifamily housing (38.5%)
- Industrial properties (22.4%)
- Retail facilities (13.2%)
- Hospitality properties (12.2%)
- Office buildings (5.1%)
- Self-storage facilities (4.5%)
- Mixed-use properties (4.1%)
Top holdings include preferred equity positions in properties like GM Palace and the Ala Moana Center, alongside mezzanine loans for properties like The Royal and interests in portfolios from major real estate investors like Blackstone and Starwood.
For high-income investors, FORAX represents a middle ground between traditional cash alternatives and higher-risk investments, with the QBI deduction providing a meaningful tax advantage that improves after-tax returns.
Practical Implementation for High Earners
For high-income professionals looking to optimize their cash management strategy, consider this approach:
- Reserve Analysis: Determine your true cash needs across emergency, opportunity, and planned expenditure categories.
- Tax Optimization: Calculate your effective tax rate on interest income to understand the potential benefit of tax-advantaged vehicles like BOXX or FORAX with its QBI deduction.
- Time Horizon Planning: For funds you don’t need within the next 12-15 months, BOXX may offer superior after-tax returns through long-term capital gains treatment. For longer-term income needs, FORAX provides monthly distributions with QBI advantages.
- Risk Tolerance Assessment: For those willing to accept some market exposure in exchange for growth potential, a portion of cash reserves might be allocated to buffered ETFs like BALT or real estate debt through FORAX.
Important Considerations
Before diving into these alternatives, high-income investors should be aware of several factors:
- State taxes may affect the net benefit, particularly for residents of high-tax states.
- While BOXX aims for cash-like returns, it’s not FDIC-insured like bank deposits.
- BALT still carries market risk, albeit buffered, and is not suitable for true cash reserves needed for immediate liquidity.
- FORAX, as an interval fund, offers limited liquidity compared to ETFs or traditional cash investments, with repurchase opportunities typically limited to quarterly windows.
- The QBI deduction for REIT dividends (like those from FORAX) is subject to income limitations and may phase out for taxpayers above certain income thresholds.
- Regular portfolio review remains essential to ensure these products continue to align with your financial goals and risk tolerance.
Conclusion
For high-income earners, the tax efficiency of cash and income investments can significantly impact overall portfolio returns. Products like BOXX represent a thoughtful evolution in cash management, potentially offering substantially improved after-tax yields compared to traditional vehicles through preferential tax treatment.
Meanwhile, interval funds like FORAX provide alternative income streams with their own tax advantages through the QBI deduction, making them worth consideration for investors who can accommodate their more limited liquidity structure.
As cash yields have risen substantially in recent years, the tax burden on traditional cash vehicles has become increasingly significant for high-income investors. By incorporating tax-advantaged alternatives like BOXX, BALT, and FORAX into a comprehensive portfolio strategy, high earners can potentially improve their after-tax returns while maintaining appropriate levels of risk and liquidity.
As with any investment decision, consulting with qualified financial and tax advisors remains essential to ensure these strategies align with your comprehensive financial plan. However, for those in top tax brackets seeking to optimize their cash positions, looking beyond conventional CDs and money market funds to tax-efficient alternatives could prove financially rewarding.
Disclaimer: This article is for informational purposes only and does not constitute investment, tax, or legal advice. Past performance does not guarantee future results. All investments involve risk, including potential loss of principal. Investors should consult with their financial advisor, tax professional, and legal counsel before making any investment decisions. Information about specific investment products is provided as general examples only and should not be considered recommendations or solicitations to buy or sell any security. Tax laws are subject to change, and the tax treatment of investments may vary based on individual circumstances.