Track Any Stock Instantly
Just enter up to ten of your stocks in the Stock Tracker box, click the ADD
button beside any of Today's Hot Stocks, or click ADD beside any of the stocks
you've Recently Viewed.
Click ADD next to any stock below to add it to the Stock Tracker
Asset Allocation
Location, Location, Location: A Primer on Asset Location
by Madaline Creehan (Write for us!)
(Click on the links within the article to get definition of that word)
A typical portfolio usually consists of taxable accounts and tax-advantagedretirement accounts funded with multiple asset classes. Asset location maintains that investments that tend to lose less of their return to income
taxes should be placed in taxable accounts (trusts) while investments that lose more of their return to incometaxes be placed in tax-deferred accounts (IRAs and 401Ks). Asset location achieves this objective by identifying the optimal location for each asset class. For simplification, the primary asset classes referenced in this discussion are stocks and bonds.
When implementing asset location, the factors to be considered for each client's portfolio range from their cash flowneeds, tax bracket, prevailing tax laws, and the tax characteristics of the asset classes. This method of placement has the potential over time to add value over a pro-rata approach to funding each account within a portfolio. The pro-rata approach structures each account similarly, while the asset location methodology determines the location of each asset class based on where it provides the most after tax benefit to the portfolio.
The Tax Relieflegislation of 2003 (JGTRRA) provided greater incentive and opportunity to implement asset location by reducing the tax
rates on qualifieddividend income from ordinary tax rates to a maximum rate of 15%. Broadly speaking, most, but not all, qualified dividends are generated by stocks held in your equitymutual funds. In the past, dividends from equities were not receiving preferential tax treatment. As a result, it made sense to hold equities in retirement accounts to avoid paying tax on the dividend income until that income had to be withdrawn. The reduction in tax rates for qualified dividends was a strong factor in the support of implementing asset location in the structure of your overall wealth to minimize tax ramifications. This adds value over time to the after-tax return of the portfolio.
Conversely, taxable fixed income investments and REITs generate non-qualified dividends making them more suitable investments for retirement accounts such as IRAs. Non-qualified dividends do not receive preferential tax treatment, which subjects the income to ordinary income rates regardless of where the assets are housed. With that being the case, placing these assets in retirement accounts such as IRAs provides the opportunity for tax-deferred growth and the deferral of tax on the income until withdrawn.
When reviewing your quarterlystatements, if you have any questions as to the location of your assets, please give us a call or list it on your agenda for discussion at your next review.
How to use this tool 
How to use this tool 
Print Article
Cite this article
