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Asset Location

Asset Location

In this week’s episode, Matt Robison and I discuss asset locations. No, we aren’t giving away CIA operatives’ whereabouts, we are talking about how where you put your investments can make a big difference on your return, to the tune of $74k!

Asset Location Matters

First, what are we even talking about when we say asset location? Simply put, it is where your investments are being held. For example, you might have a 401k, an IRA, an HSA, a 403b, or a brokerage account… these are all “locations”. The assets are your stocks and bonds. So, where you put your stocks and bonds, particularly bonds, is important. Why? Good question.

You know by now from previous podcasts which accounts you should put your savings into and in what order. You also know how to balance your portfolio. Now you will learn how to maximize your tax savings by putting your bonds into tax-free or tax-deferred accounts. You don’t want to hold your bond in your brokerage accounts. Why? Because as they earn interest, you will be taxed on the capital gains. If, instead, you have the bonds held in a 401k or an IRA, you will not be taxed on those dividends which are historically high right now. 

How to save $74,000

Not convinced? Let’s take a look at the math using a real client story (I changed her name): 

Jane is about to retire. She has $1m in her portfolio and is ready to leave her job next year. We’ve run the numbers and she’ll be fine with her retirement lifestyle. However, I noticed that she has a lot of cash, money market funds, and bonds in her taxable account and is more aggressive (80% stocks) in her 401k. The interest and dividends in her taxable account are a big tax drag. According to research done by Vanguard, moving the bonds to a tax-free account can boost her returns by .3%. While that may not seem like much, over 30 years and with compounding, that number comes to $74,000!

How to Review Your Asset Location

Now that you see the benefit of planning your asset locations, let’s talk about how to make that happen. 

  1. Review your account types: Do you have Traditional, Roth, and Brokerage?
  2. Keep taxable fixed income in tax-advantaged accounts and low-cost index funds (equities) in taxable accounts
  3. Higher-dividend stocks and active funds belong in tax-advantaged accounts where dividends and capital gains are not taxed every year: keeping more money in your pocket!

This sounds like a lot of work!

At the end of the day, if this all seems like too much, don’t worry. I have a tried and true “good enough” strategy for you:

  1. Save 15% of your gross income
  2. Invest aggressively, 70% – 90% in stocks with low-cost index funds

Optimizing asset locations is like the icing on a cake – nice to have but not imperative to a delicious dessert. 

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Asset Location

Episode 135 •

05th March 2024