Asset Location

You have probably heard about “asset allocation,” but you might not have heard about “asset location.” Think of asset allocation as the calculated mix of asset types to ensure you are within your risk comfortability and capacity. Think of asset location as a strategy to improve the tax efficiency of your investments.

When building your portfolio, it is important that you consider the characteristics of each asset type (stocks, taxable bonds, municipal bonds, mutual funds, ETFs, REITs) and the account type (traditional IRA, Roth IRA, taxable, trusts) before investing. Asset location is the purposeful placement of specific asset types in specific account types.

Here are some examples of this strategy in action:

• Buying municipal bonds inside a qualified retirement account like an IRA, would eliminate the benefits of potential tax-free bond interest
• Buying corporate bonds inside a taxable account like a Joint investment account, would increase your tax liability because bond interest is considered ordinary income and taxed at marginal rates
• Purchasing riskier asset types like growth or speculate stocks inside a Roth IRA could be more beneficial from a tax perspective since all future gains are tax-free

Business Made Simple

By: Donald Miller