What is Asset Location? How this strategy can save you on investment taxes

Investments all have a variety of tax implications. If you manage yours right, you could save tons on taxes!

January 4, 2022

What is Asset Location?

Asset Location: a tax-saving strategy that will save you a lot of money.

When it comes to investing, most people don't consider taxes for their portfolios. They underestimate the importance of placing suitable investments in the right accounts.

Let's take a look at asset location, how it works and how it can be a great way to reduce your tax bill year after year.


Distribute Your Investments

As you may know, a lot of people invest through either an IRA, a brokerage or bank account. Most have many shells for different accounts, but don't always consider how to distribute their investments.

For example, you may have stocks and bonds in your IRA and Roth accounts, as well as some stocks and real estate in your brokerage account, but have no thought process laid out for what's in each account. Some believe that each account needs to have a diversified portfolio; nevertheless, you can have a tax-effective portfolio by coordinating your portfolio across multiple accounts.

Because all investments are not created equal in terms of taxation, you should treat your portfolio as a whole rather than dividing it into separate accounts.

For example you have very tax-efficient vehicles and very tax-inefficient.


Tax-Inefficient Vehicles

Real estate and high-yield corporate bonds are examples of tax-inefficient vehicles because they generate a lot of revenue.

For example, you may have one real estate fund generating 5% or more per year in income. Whatever your income tax rate is, that's how that 5% income will be taxed at. That could be 40-50% for some people. That’s a pretty high tax rate.


Tax-Efficient Vehicles

Whereas, traditional bond funds and active stock funds are moderately tax-efficient. They may still generate tax bills but for example, any dividends or stock sales may be at taxed at 15 or 20% capital gains rate. As opposed to the 40-50% tax rate. So, these are s lot more tax-effective.

Municipal bonds and large-cap equities that don't pay a dividend are examples of tax-efficient vehicles as you move up the rankings.

For example, if you have a high-growth company that is purely focused on appreciation, you will be taxed at the capital gains rate, and there’s no dividend- they aren't providing you with income that may be taxed at a higher rate.

As a result, all of these factors influence the tax efficiency of investments.

Real Estate Tax-Advantaged Accounts

Anything with higher income potential, like real estate, may make more sense to put in a tax-advantaged account, such as an IRA or Roth IRA, because taxes aren't a factor. In an IRA, you don't have to worry about taxes. If you have a real estate investment in your IRA, the income will stay in the IRA and can be reinvested. You don't have to worry about taxes!

High-Growth Stock

A high-growth stock can be held in an investment account. When it grows, however, you must consider taxes. In the end, the capital gains tax rate will be significantly more than the income tax rate.

Overall, being strategic with where your various investments go in your portfolio may be a vital contribution to ensuring that your assets in your portfolio lasts essentially not tipping Uncle Sam.

You can have your entire portfolio and network grow in a systemized fashion by just considering:

1) Where are my assets?

2) How are they taxed?

3) Are they in the best location for their tax rate?


Remember, there are some intelligent ways to think about taxes and portfolio growth in conjunction to obtain the best of both worlds and offer yourself the best chance of ensuring your assets endure through retirement or just increasing your net worth.

Hopefully, you found this information to be beneficial.


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