It’s not just what you invest in, it’s where you hold those investments. The savings vehicles you use to hold your assets are a critical factor in enhancing after-tax returns. Hear Louis explain the tax planning techniques our wealth management team uses when designing client portfolios:
Asset Location Optimization: Where Should You Hold Investments?
Determining where to hold your investments will depend on your goals, current financial and tax situation, risk tolerance, and retirement timeline. To help inform your decision, first consider the various return components and how they are taxed in different accounts:
- Investment Returns: Typically, returns come in two categories:
- Appreciation: Change in price, typically seen with assets like stocks.
- Income: Including dividends and interest payments from assets such as bonds.
- Tax Treatment: Each savings vehicle also has different tax rules:
- Taxable Accounts: You typically owe taxes on assets held in these accounts when you receive dividend or interest payments or when you sell an appreciated investment.
- Retirement Accounts: You generally only pay taxes once you begin making withdrawals in retirement, or not at all if you are withdrawing from a tax-exempt account, like a Roth IRA.
Understanding these key components can help you determine a thoughtful strategy to improve your overall tax-efficiency. For example:
- Appreciation-Oriented Assets: Holding these types of investments long term in a taxable account will allow you to benefit from more favorable capital gains treatment in the future when you eventually sell and control the timing of sales.
- Income-Oriented Assets: Holding these types of investments in retirement accounts allows your funds to compound tax-free until you begin making withdrawals in retirement, which may provide more income stability as your cash flow changes.
This is just one example of our thoughtful approach to tax-efficient investment management. We often guide clients through this process, as well as other tax-saving strategies, considering their unique situations and objectives. For example, a young tech professional, decades before retiring, may take a different risk and asset location approach than an executive approaching retirement in the next five years.
If you want to learn how to optimize your asset location, contact us today. If you’ve yet to complete a Financial Diagnostic, we encourage you to do so to get a better picture of your financial situation.
TRANSCRIPT
Louis Odette (00:06 -01:24)
Did you know you can potentially enhance your after-tax returns by being thoughtful about where you hold your investments, rather than just what you invest in?
Generally speaking, investment returns come in two forms. There’s appreciation, or change in price, and then you also have income from dividend and interest payments. Also, each account type has its own tax rules.
Ordinary brokerage accounts typically owe tax either when dividend and interest payments are received or when profitable investments are sold at a gain. On the other hand, retirement accounts typically don’t owe any tax until withdrawals are made from the accounts, or may be entirely tax exempt in the case of Roth-style accounts. By being thoughtful about where you put each type of investment and each type of return component, you can enhance your overall tax efficiency.
For example, putting income-oriented investments into a retirement account allows them to compound tax-free until those withdrawals are ultimately taken. And putting appreciation-oriented investments into a taxable account allows investors to benefit from favorable federal capital gains treatment. Location optimization is just one of the many tax management techniques we use behind the scenes when managing client portfolios.
Disclaimer: Case Studies are provided for illustrative purposes only to provide an example of the firm’s client base, process, and methodology. The experiences portrayed herein are not representative of all firm clients. Other individual outcomes may vary based on their individual circumstances, and there can be no assurance that the firm will be able to achieve similar results in comparable situations. No portion of this case study is to be interpreted as a testimonial or endorsement of the firm’s financial and investment advisory services. Client tax situations are unique and specific, and you are encouraged to consult a tax professional to analyze your specific situation. This material has been prepared for informational purposes only, and is not intended to provide tax, legal or accounting advice; nothing contained in these materials should be taken as such. The opinions expressed in this article are not intended to provide specific advice or recommendations for any individual or on any specific tax strategy or security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Opes Wealth Management cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Advisory services are only offered to clients or prospective clients where Opes Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Opes unless a client service agreement is in place.
