Summer Savings Strategies: Asset Location and Why It Matters

Jun 12, 2019

By Nick Frigerio, Planning and Research Associate, Associate Vice President

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Many are familiar with the concept of asset allocation, the ability to reduce portfolio risk through diversifying assets among equities, fixed income, and cash or equivalents. Equally important is knowing how to distribute your diversified assets across taxable, tax-deferred, and tax-free account types, a concept known as asset location.

Investments are subject to a wide variety of tax rules and different account types are subject to different tax treatments. The process of asset location can help lower your investment related taxes, potentially increasing your overall return.

So which account types should you put your investments in?

Each individual will have their own unique situation and you will first want to make sure your portfolio is well diversified and in line with your risk tolerance and investment objectives. Once you are comfortable with your investments, meet with your advisor to discuss account type options in respect to the accounts that you currently have. Generally, your most tax-efficient assets (tax-free municipal bonds and other municipal securities, equities held for long term growth, and indexed mutual funds or ETFs) would be held in taxable accounts.  Your assets that are less tax efficient such as REITs, short term equities, actively managed high turnover mutual funds, and taxable bonds would typically be more effective in tax-deferred accounts such as your 401k, IRA, SEP, and SIMPLE or tax-free accounts such as your Roth IRA, 529 Plan, Education Savings Account, or Health Savings Account.

Having a proper asset location strategy may improve your tax situation and could give you more flexibility on distributions during retirement to cover income needs.

If you are unsure whether you have a properly diversified, tax efficient portfolio, please contact your Benjamin F. Edwards financial advisor.

Benjamin F. Edwards & Co does not provide tax advice therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation. Asset allocation/diversification cannot guarantee a profit nor protect against a loss.