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(Asset) Location, Location, Location Thumbnail

(Asset) Location, Location, Location

Welcome to Week 1 of our Tax-Smart Financial Planning series! This week we are diving into a critical component of portfolio design and tax management: Asset Location.

Creating a portfolio with an asset allocation that is best for you is pretty straightforward. It is all about allocating your holdings between stocks, bonds, and cash to maximize your chances of reaching short and long-term goals with a minimum amount of risk.

From a tax perspective, asset “location” is an essential component of this exercise and a cornerstone of portfolio design.

What is the purpose of asset location? Generally, it means minimizing your taxes over time by leveraging different investments with different tax treatments strategically within taxable, tax-deferred, and tax-free accounts.

To be clear, applying a tax-efficient asset location strategy is not a one-size-fits-all undertaking. The optimal location for your investments depends on factors like your investment time horizon, tax bracket while working, expected bracket when retired, and the return characteristics of your portfolio holdings. Bogleheads shares a great visual showing the tax efficiency for the major asset classes.

Typically, tax-efficient stock funds (for example, exchange-traded funds offered by Vanguard or Dimensional Fund Advisors) and municipal bonds/funds are best placed in taxable accounts. 

Taxable bonds/funds (for example, Vanguard’s corporate and treasury index funds) and actively managed stock funds with high turnover rates (i.e., lots of trading) are best placed in tax-deferred accounts. 

By implementing a thoughtful asset location strategy, you can enhance your after-tax returns and achieve greater financial efficiency over the long term. To learn more, read Vanguard's take on the nuances of asset location. Their research shows that leveraging asset location can drastically reduce taxes over the long term, specifically $74,000 in their example. 

Stay tuned for next week’s installment, where we will explore the art of tax-loss harvesting and its potential to unlock valuable tax-saving opportunities.  

Looking for Guidance?

Building tax-smart portfolios and leveraging asset locations are key to successful investing. If you have $1 million or more of investible assets and are in or close to retirement, let's discuss your asset location plan in a complimentary strategy call with me.