One of the mistakes I see DIY investors make is not using asset location.

This is different from asset allocation, or your mix between stocks, bonds, and other assets.

Asset location is which investments are best suited to different types of accounts.

I met with a DIY investor the other day who had done a great job saving, "catching up for retirement", and building income sources for retirement.

But, this couple had never heard of the concept of asset location.

They had Roth IRAs, Traditional IRAs and other retirement accounts, and brokerage accounts, but they were not considering the taxation of each account.

Often, when I see statements, I might see a 60% stock and 40% bond portfolio in the Roth IRA, Traditional IRA, and Brokerage account.

The problem with this approach is that it may cause you to pay more in taxes.

Before you read more about asset location, take a moment to learn more about the LIVE webinar I'm hosting.

For example, if you wanted to be 50% stocks and 50% bonds overall, and you had the following account balances:

• $500,000 Roth IRA
• $500,000 Traditional IRA
• $1,000,000 Brokerage Account

It likely wouldn't make sense to put bonds in your Roth IRA. It may be the last account you touch!

Bonds may slow the growth of the Roth IRA, which is extremely valuable. With the Roth IRA, growth and future withdrawals are tax-free. If you earned 10%, you get to keep the full 10%. If you distribute $10,000, you get to keep the full $10,000

The same is not true for a Traditional IRA.

If you earn 10%, you may only get to keep 8% after taxes. If you distribute $10,000 and have an effective tax rate of 20%, you may only get $8,000 after taxes.

All else being equal, you may want more stocks in the Roth IRA for the long-term growth and tax-free nature of the account.

If you agree, you could consider putting 100% of the stocks in the Roth IRA.

Then, you could put $500,000 worth of stocks in the brokerage account to reach $1,000,000 in stocks (or 50% stocks overall, across all accounts).

Finally, you could put $500,000 worth of bonds in the brokerage account, which would make that account 50% stocks and 50% bonds. Then, the Traditional IRA would be 100% bonds, or $500,000.

What's the outcome?

• The Roth IRA will be more volatile. You'll see more ups and downs, but over time, it may have a higher rate of return — all tax free!
• The Traditional IRA will be less volatile and likely have lower returns over time. This can help reduce your Required Minimum Distributions and the amount subject to ordinary income taxes.
• The brokerage account will be a mix of stocks and bonds, which can help support spending needs, can be used for tax-loss harvesting if markets go down, and gets the benefit of long-term capital gains if markets appreciate.

You can make asset location even more sophisticated by placing certain asset classes within different accounts. For example, REITs may be better suited to a tax-deferred or tax-free account because have high levels of income that can be a tax drag in a brokerage account.

Then there is the question of which bonds to include based on your tax bracket — corporates or municipals — and to which account they belong.

There are many different levels of asset location and how much of it to use depends on your own personal values and anticipated withdrawals.

​Asset location can help reduce taxes. That means potentially more money for you to spend or less risk you need to take with your investment portfolio.

Enjoy your week!

P.S. Don't forget to register for my upcoming webinar. I'd love to see you there!

Blog This Month

​How to Review Your Tax Return​

What I've Been Reading

• ​Is There Really a New, Unfair Mortgage Tax on Those With High Credit?​
• ​What’s Getting the Best of You? – Calibrating Capital​
• ​NYTimes: My Transplanted Heart and I Will Die Soon​
• ​NYTimes: 35 Ways Real People Are Using A.I. Right Now​
• ​People Are Investing in Bonds Again—Once They Figure Them Out​

Resources

​Widows and Money Facebook Group - A community to learn about money, feel empowered around your finances, and ask financial questions.

​More Than Money: Real-Life Stories of Financial Planning - Stories about the impact and value of financial planning. My story of Sara and Leo is on page 205.