Planning Your Financial Future
Great Strategy to Maximize Returns, Minimize Taxes, and Reduce Expenses

Location, location, location. No, I’m not referring to real estate, but to asset location. Most investors are familiar with asset allocation, but may not have been introduced to the power of asset location.

Asset allocation and asset location are important considerations when building an investment portfolio and most investors concentrate on asset allocation, or how much they will hold in stocks, bonds, hard assets or alternative assets. On the other hand, asset location considers where those assets should be held within their portfolio. Why? For several important reasons:

  1. Potentially increase portfolio returns
  2. Reduce taxes
  3. Reduce trading costs

Your portfolio may include several different types of accounts like joint accounts, 401ks, IRA rollovers, and Roth IRAs. For those who have started to think through estate planning, the portfolio may also include revocable trusts or even irrevocable trusts with assets outside of the estate. Asset location considers the most advantageous location for each investment as they are populated throughout the accounts within your portfolio. The goals, tax benefits, and investment options are all different for these account types, and it’s important to consider each when deciding which account should hold what assets. Think about high yield bonds. Do you own any of those in your portfolio? If so, consider putting these funds in your IRA so you’re not paying income tax on the 6% yield each year.

Asset location is one strategy that is client-specific, meaning that the goals will vary depending on each client’s age and time horizon. Even so, the result of these efforts share a common goal – provide clients with the proper risk allocation in the most tax-efficient manner.

Roth IRA and Asset Location

A Roth IRA plays a special role within a portfolio because the assets grow tax-free with after-tax dollars. These will likely be the last dollars that we recommend our clients tap, so this allows us to take some additional risk in the portfolio due to the extended time horizon. We include the Roth IRA in the total portfolio, but we use asset location to populate this account with more aggressive stock funds.

Enhancing After-Tax Returns with Asset Location

A lot of individuals and some advisors choose to look at each account separately, or they just populate the retirement accounts with more aggressive assets. We think this is a lost opportunity. Instead, take the time to look at your accounts collectively, and use asset location to enhance the after-tax return of your investment portfolio. You may already have the proper asset allocation, but are you paying unnecessary taxes?

Interested in learning more? Read: The Best Way to Minimize Taxes With Asset Location