Asset Location Explained

Hello, Matt Blocki with EWA. Today we are excited to discuss the concept of asset location and how this can add a lot of value in your investment and wealth management plan. Asset location simply means placing an asset class in an account that makes it maximized and tax efficient.

I like to use the analogy of football when we talk about investing. So asset location is as simple as saying we want our quarterback to stay in our quarterback position. You probably wouldn’t take a quarterback and put them on the defensive line.

They’re not built like that. They don’t have a skill set for that. An investment portfolio. We see a lot of haphazard moves typically made in an investment portfolio. So Roth. IRA Traditional. IRA. Four hundred and one K, a regular taxable or brokerage account.

The composition of those investments we’ve seen a lot of times are the same. There’s no thought or detail. That’s like having the quarterback on the defensive line. So to avoid that, first we need to make sure that everything is viewed as one plan.

Every account I just described the Roth, the traditional, the taxable that’s all your football team, the quarterback. We want to go in the right position. So the Roth IRA is an example, is where we get all appreciation tax free.

After the age of 59 and a half, everything comes out tax free and there’s no sequence of return risk because there’s no required minimum distributions. Therefore, the Roth should have the highest returning assets or the highest assumed returning assets.

Also, higher volatility is completely okay. So things like equities, large cap, small cap, mid cap, emerging Markets International should be in the Roth IRA. If you’re going to have fixed income, most likely we want that in tax account.

A pretax account means you got the tax deduction when you put the money in it’s now growing tax free, but at the end, at 72, when you’re going to be forced to take required distributions, there will be a tax associated with every dollar that comes out of a pretax account.

So because that’s a partnership with the government, if we’re going to have some safe money. And we don’t want to have to take the money at a loss when those required distributions start want to limit variabilities.

And we also want to make sure that our highest returning asset classes aren’t getting shared with the government. So this is where we’d want to have fixed income or lower volatility equities invested in.

And then a taxable account is all based upon tax rate. But typically we want to have growth stocks where you don’t have to show any tax liability until you actually sell out of them. So a growth ETF that holds a couple of hundred equities would be very good thing to put in a taxable account.

What we want to avoid in a taxable account for clients that are in the highest tax brackets would be corporate bonds that are paying interest that you’d have to report as income. And we’d also want to avoid high turnover funds where the capital gains are forced on you.

So we want to focus on, again, exchange traded funds, individual securities, and especially growth equities to even avoid paying taxes on dividends or any interest we welcome. Any questions? Asset location, if done properly, can add a tremendous amount of value, even millions of dollars of value, if done correctly over a long period of time, and especially while you’re distributing your money in retirement and creating as much tax efficiency as possible.

Even a half a percent per year of efficiency due to asset allocation can be a huge difference of money in your pocket versus the government’s pocket during your most important years of life.