Asset Location

Asset Location in your Portfolio

Asset location is a smart way to organize your investments across different account types (like taxable brokerage accounts, Traditional IRAs, and 401(k)s) to potentially lower the taxes you pay and increase your after-tax returns. The main idea is to put certain investments in accounts where they'll be taxed less or not at all.

For example, investments that generate taxable income, such as taxable bonds and international bonds, are often placed in tax-advantaged accounts like Traditional IRAs or 401(k)s, and sometimes even Roth IRAs.

Let's illustrate this with an example. Imagine you have $1 million, with $500,000 in a taxable brokerage account and $500,000 in a Traditional IRA. You've decided on a 50/50 split between stocks (equities) and bonds (fixed income).

With asset location, you would likely put all your stocks ($500,000) in your taxable brokerage account and all your bonds ($500,000) in your Traditional IRA.

Now, let's see why this might be better than simply splitting each account 50/50. If you split each account, you'd have $250,000 in bonds in your taxable account. Let's say those bonds earn 5% interest per year, which is $12,500. If you're in a 35% ordinary income tax bracket, you'd pay $4,375 in taxes on that interest just for holding the bonds in your taxable account.

Beyond bonds, you might also consider holding other higher-yielding, potentially more tax-inefficient investments like REITs (Real Estate Investment Trusts) or MLPs (Master Limited Partnerships) within your tax-sheltered accounts to further reduce your tax bill.

It's important to remember that your investment goals should always come first. This asset location strategy works best when all your accounts are aligned with the same long-term goal, like retirement. For instance, if retirement is 40 years away, but you're also saving for a second home in the next 10-12 years, you should prioritize investing appropriately for each of those goals, even if it means not being as tax-efficient.

Also, keep in mind the rules of each account type. You usually can't easily access funds from a 401(k) while you're still working, and early withdrawals from an IRA might come with penalties unless certain exceptions apply. Your life and financial goals can change, so staying flexible with your strategy is key.

While asset location can be a valuable tool for saving on taxes, it's just one piece of the puzzle. If you have questions or concerns about how this strategy fits into your overall investment and tax plan, please click the link to Schedule a Free Consultation.

Disclaimer

Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities. 

Stratos or Synergy Wealth Management does not provide tax or legal services. Please consult legal or tax professionals for specific information regarding your individual situation.

These examples provide certain potential financial strategies that are based on various assumptions and are therefore hypothetical in nature and not guarantees of investment returns. You should consult your tax and/or legal advisor before implementing any transactions and/or strategies concerning your finances