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Start Your Wealth Management Journey with Smart Asset Location

Wealth Management • Mar 25, 2024 8:21:04 PM • Lamont Brown MBA, CFP®

Imagine a world where your investments work smarter for your financial success. This is the power of asset location—the strategic placement of your assets that can potentially improve your financial success.

Understanding Asset Location

Asset location is a wealth management strategy that can help with tax management. The strategy helps you strategically diversify the location of your investments in different types of accounts based on their tax treatment and characteristics (income, growth, and holding period). It's about knowing which basket to put your financial eggs in so that they not only have the opportunity to grow but also hatch with minimal tax bite. By understanding asset location, you may be able to optimize your investment portfolio, minimize taxes, and maximize overall returns.

Different accounts mean different tax rules. For instance, investments held in a traditional IRA are tax-deferred. Putting your money into an IRA may grow without you paying any tax until you're ready to retire and make withdrawals. Also, investments in an IRA can be managed more actively because selling an investment would not be a taxable event. On the other hand, investments held in a taxable brokerage account are subject to capital gains tax.

By placing your assets in the right type of accounts, you can play the long game with your taxes and potentially maximize your after-tax returns. 

Asset location is not just about tax savings, though. You also want to consider the potential returns of different investments. For instance, you may want to consider putting investments with high growth potential into tax-advantaged accounts like a Roth IRA, where it could have the option to grow tax-free and later you could enjoy tax-free withdrawals upon retirement.

Overall, understanding asset location allows you to optimize your investment strategy by considering both tax efficiency and potential returns.

Maximizing Tax Efficiency

One of the key benefits of strategic asset location is improving tax efficiency. Placing investments with high income potential in tax-free or tax-deferred accounts could minimize the taxes you pay. 

For example, income-generating investments like dividend stocks and bonds generate income regularly. Thus, it may be better to place them in tax-advantaged accounts like a traditional IRA. This way, you can defer taxes on the income until you withdraw it in retirement, allowing it to grow tax-defered.

Tax-neutral investments like growth stocks may do well in a taxable brokerage account. This type of investment typically does not generate income and may offer additional tax benefits if held for more than one year. 

On the other hand, investments with lower tax implications, such as municipal bonds may be more suitable for taxable brokerage accounts. Municipal bond income can be both federal and state tax-exempt making them potentially tax-neutral investment vehicles.

Mutual Funds vs. ETFs

Aside from traditional investments like stocks, and bonds other vehicles like mutual funds and ETFs offer you the opportunity to invest in a diversified pool of traditional Investments.  Furthermore, investing in mutual funds and ETFs also has special tax considerations.

Mutual funds allow you to access a professionally managed pool of investments. Each mutual fund generally has a portfolio management team whose job it is to achieve their targets, and manage risks. However, the managers focus on their targets may create taxable gains that they could pass on to you as an investor. These gains are generally distributed annually.  These distributions may create a potential negative tax impact because the percentage of distribution is often unknown until later in the calendar year.   

Similarly, exchange-traded funds (ETFs) are an investment type that allows you to access a professionally selected pool of investments. Traditionally, ETFs are not actively managed and their unique structure enables them to buy and sell investments with minimal tax impact.  ETFs typically do not distribute gains like a mutual fund, making them generally more tax-efficient.

Implementing a Comprehensive Asset Location Strategy

Implementing a comprehensive asset location strategy involves careful planning with consideration of your financial goals, risk tolerance, and investment timeline.

Here are some key steps to consider when implementing an asset location strategy:

1. Assess your investment portfolio: Evaluate your current holdings and determine their potential tax impact based on their income and potential growth. Identify investments that may be better suited for different types of accounts based on these factors.

2. Understand tax rules and regulations: Familiarize yourself with the tax rules and regulations related to different types of accounts and investments. This may help you make informed decisions when allocating your assets.

3. Know what you own: Be familiar with the different types of investments you own and where you own them.  Consider between ETFs or tax-managed mutual funds if you want more tax-efficient investment vehicles.

4. Consider your full Wealth Management Picture: Your full Wealth Management picture includes your financial, risk tolerance, estate planning, and tax planning goals.  For example, if you want to leave assets to others your asset location would consider your options based on these factors.

By having a comprehensive asset location strategy, you could potentially improve your returns and optimize your long-term financial success.


This article is provided for educational purposes only and is not personalized advice. Please consult with a qualified professional regarding your specific financial situation.

Asset location strategies do not ensure a profit or guarantee against loss. Investing involves risk and the potential to lose principal. 

Bonds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.  Although the income from a municipal bonds is exempt from federal tax, you may owe taxes on any capital gains realized. For some investors, a portion of the income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.

When taking withdrawals from an IRA before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax. Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both.

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Lamont Brown MBA, CFP®

Principal Wealth Advisor