Strategies for Success: How Asset Location is Tax Smart

Marshall Rathmell |
Categories
Author - Lindsay Birchfield

This blog is one of several that will be posted as a follow-up to our Tax Smart Investing presentation. The presentation was focused on how to maximize your portfolio’s after-tax return.

 

You probably hear asset allocation more often than asset location. While both are important when it comes to constructing a portfolio, they are different.

 

Asset allocation determines your investment mix. What percentage of your assets do you want to hold in equities? Bonds? Asset allocation is used to decide how much risk is appropriate for you to take on in pursuing higher returns.

 

Asset location is determining where to hold your different assets in the most tax-efficient way.

We want to hold our least tax-efficient investments in our deferred or Roth accounts when possible.

 

Real Estate assets can have different or more complicated taxes than equities, so we want to avoid having it in a Taxable account. Because of the performance potential for Real Estate, a Roth is our preferred placement. A deferred account would be our next option.

 

Fixed income generates regular income that is taxed as it is earned. Instead of creating more taxable income in a Taxable account, we prefer to keep Fixed Income in a deferred account. Since we want to see as much growth in a Roth as possible, we don’t want to have Fixed Income in it. Remember, we use Fixed Income to act as a defense to market volatility in our portfolios. We do not rely on it for growth.

 

Investing by your whole portfolio rather than each account gives you the benefit of strategizing asset location.

 

There is an Art and Science to implementing a portfolio in a tax-efficient way.

 

 The Science is using the knowledge we have about different asset classes and their tax-efficiency to place them into the account that is most favorable.

 

The Art is using what we have to the best of our ability because there is no perfect portfolio.

 

Tax efficiency is just a part of the bigger picture. There may be other tax planning needs that need to be considered beyond your investment portfolio.

 

Check out our other Tax Smart blog posts that were developed from our presentation :

 

 

Some of the material above was provided by Wendy J. Cook Communications, LLC