Asset Location

Many investors have heard of asset allocation, but few are familiar with the concept of asset location, which is the strategic division of assets across an investor’s accounts based on those assets’ tax liability. Proper asset location is extremely important in maximizing the investor’s net return; several studies have shown an investor can lose up to 20% of their after-tax return by mis-locating investments in the wrong type of account. And yet a recent Federal Reserve survey showed most investors populate taxable and tax-deferred accounts with identical securities.

Under the current tax code, capital gains and income are taxed at different rates. Because the sources of return for investments vary (capital gains, dividends and income) it is advantageous to place tax-efficient investments in taxable accounts and tax-inefficient investments in tax-deferred accounts to the greatest extent possible.  

By placing high-income investments such as REITs and bonds in a tax-deferred account investors can shelter much of that income from taxes. Meanwhile, low-income, low-turnover investments such as large-cap stock funds can be placed in taxable accounts due to their greater tax efficiency.

Proper asset location can help many investors increase their after-tax return without assuming additional risk, and this is a major focus of our portfolio management efforts at Stonebridge Advisors.

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