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A comprehensive investment plan can and should help improve after-tax outcomes by coordinating asset allocation with asset location. Demonstrate the value you bring to clients, and separate yourself from their other providers by illustrating the importance of asset location with this explanation:
"If asset allocation is what you invest in, asset location is where those investments are placed. While owning the 'right investments' in the right accounts can influence returns, owning the 'right investments' in the wrong accounts can cause unnecessary tax costs."
Asset location refers to the type of account that holds an investment. Clients may want to consider:
- Tax-friendly accounts such as Roth and traditional IRAs and 401(k)s for investments that generate high levels of income, or portfolios that require ongoing rebalancing and may generate substantial short-term capital gains.
- Taxable brokerage accounts for tax-advantaged fixed income, such as municipal bonds. These are assets producing qualified dividend income over which you can control the timing of capital gain recognition events. Holding assets in a taxable account can also be used for tax-loss harvesting opportunities. Then clients can offset realized gains with realized losses in the same or another taxable account.
While asset allocation decisions may explain most of a client's pre-tax returns, tax-smart asset location helps them keep more of what they've earned.
Bottom line: Help prospective clients improve after-tax returns by demonstrating how asset location can be as important as asset allocation.
"While asset allocation decisions may explain most of a client's pre-tax returns, tax-smart asset location helps them keep more of what they've earned."
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The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Tax laws are complex and subject to change. Investors should always consult their own legal or tax professional for information concerning their individual situation.
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