What You Need to Know About Asset Location

Most people have heard of asset allocation.

But most don’t know about asset location.

Getting this right can lead to 6-7 figures in tax savings.

Asset location is all about putting the right assets in the right accounts based on taxes.

But before we get into that, you have to understand how each account works:

1. Tax-deferred accounts

Tax-deferred accounts are where you put money in pre-tax:

• This money can then be invested
• It can grow tax deferred
• But then you pay taxes when you pull the dollars out at your income rate

Your income rate is the highest tax you will pay, capital gains are way lower.

Some examples of tax deferred accounts are:

• Traditional IRAs
• Traditional 401(k)s
• Sep IRAs
• Etc.

2. Tax-free accounts

Tax-free accounts are where you put in post tax dollars:

• This money grows tax-free
• Then it can be taken out tax-free

Really powerful. Some examples are:

• Roth IRA
• Roth 401(k)
• HSA (when used correctly)
• Mega Backdoor Roth

3. Taxable Account

This is an account where you put in post-tax dollars:

• Then you pay tax yearly on the dividends and income
• And you pay capital gains based on the time frame you hold it for
• You pay tax at your income rate if held under 1 year
• And long term capital gains rates (0%, 15%, or 20%) if held for greater than 1 year

This a way lower rate than income, which is why it can be so powerful.

So now that you understand the type of accounts, let’s talk about asset location.

You want to view all of your accounts as one portfolio and putting the right assets in the right account.

For example, let’s say you wanted an 80/20 portfolio.

In reality, you would not want each account to be 80/20.

You might want all 20% of the bonds in a tax-deferred account, and your Roth to be all equities.

Anyways, lets dive more into each type of account and what best goes in each:

Tax-Deferred

Since tax deferred accounts will come out at income rates in the future (the highest you could pay), you want your lowest growing assets in traditional. Also, there's no tax drag on bonds since it’s tax-deferred.

Roth Accounts

Since Roth accounts grow tax free and you pay no tax when taken out, you want your highest growing assets in Roth.

Let’s say you put in $500k over 30 years and it’s now worth $2.5mil.

If this was in a taxable account, you would have capital gains on the $2mil of growth.

With Roth, it’s $0 of tax.

Taxable

Since taxable has capital gains when you sell and taxes on dividends today, you want your most tax efficient assets in taxable.

Preferably ETFs. It’s pretty simple.

Again, people think of each account as the same portfolio.

This is not what you want to do.

You want to think of all of your accounts as one portfolio but different assets in each based on taxes, your time frame, etc.

Let’s say you hold a mutual fund that pays out $40k a year in dividends that are taxed at your income rate.

You would much rather this be in your tax-deferred or free accounts so you do not have to pay those taxes yearly.

Let’s say you are buying a stock you think will grow exponentially.

You would want that asset in Roth so you never pay taxes on it again.

Let’s say you want to hold some bonds for stability.

You would want that in your tax-deferred accounts since you will pay at your income rate in the future.

Make sense? Let’s recap:

• Highest growth assets in Roth
• Lowest growth assets in traditional
• Most tax efficient in taxable

Take a look at your portfolio today.

Minimizing taxes is a game changer.