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Ways to Minimize Taxes with Asset Location

Investing Insights


Location, location, location.  We have all heard this saying before.  In investing, this same concept is vital for you and your bank account.  Many new investors to discover that two people with identical portfolios can have widely disparate results throughout several years. The reason arises from asset placement.

Taxes are one of those events that are hard to avoid. However, there are ways that you can reduce your tax burden by reducing your taxable income from interest, dividends, and capital gains.  Using a strategy called active asset location, an investor determines which securities should be held in tax-deferred accounts and which securities should be held in taxable accounts in order to maximize after-tax returns, since different types of investments get different tax treatments.

Match Investments with the right account type

Use this simple guideline to help your decision when deciding which type of accounts to place your assets (stocks, corporate bonds) in: 

Assets that should be placed in tax-advantaged accounts (401k, IRA) include:

  • High-yielding common stocks with dividend payouts;
  • Corporate bonds;
  • Shares of real estate investment trusts (REITs)

Assets that should be placed in regular, non-tax advantaged accounts (brokerage) include:

  • Common stocks with little or no dividend payouts that you expect to hold for more than a year;
  • Tax-free municipal bonds (since they are already tax-free, there is no need to place them in tax-advantaged accounts)

Choose tax-efficient investments

Specific investments can carry tax benefits as well. For instance, income earned from municipal bonds is generally tax-free at the federal level and, in some cases, at the state and local levels too.  Another investment option to consider is Exchange Traded Funds (ETFs).  One major benefit of an ETF is the tax advantage it holds over a mutual fund. ETFs are more tax-efficient due to their construction and the way the IRS classifies them. Specifically, capital gain taxes are only realized on an ETF when the entire investment is sold whereas a mutual fund incurs capital taxes every time the assets in the fund are sold.

“Investors should first start out with an asset allocation strategy depending upon their goals, risk propensity and time horizon.  Once that has been determined, I think an asset location strategy is an important add on,” says Aaron Gummer, Founding Partner at Royal Road Wealth Partners.

To schedule a meeting, visit us at royalroadwealth.com or contact us at info@royalroadwealth.com.