Asset Locations

Asset Locations In Tulsa, OK

Asset location is a strategy. This strategy is the placement of your investments into account types to work to your advantage. The goal is to maximize after-tax earnings over time.

However, before a strategy is devised, the investor must weigh and understand the investment horizon, risk tolerance and goals. These aspects of investing are defined specifically by each investor.

The benefit of an active asset location strategy is to maintain control of the only stage of investing within your control. One cannot control the market or the tax laws, but an investor can control the placement of assets into accounts to improve after-tax earnings. Earnings after tax are improved by reducing the overall tax liability.

How an Asset Location Strategy Works

The difference is the accounts lend to the tax-exempt and the tax-deferred, and it is important to understand the differences relative to investment goals.

Accounts that are tax-deferred delays the payment of taxes until the money is withdrawn. Accounts that are tax-exempt requires all taxes be paid prior to the deposit. There are limits to all tax-advantaged accounts to prevent investors from depositing all their assets into these accounts.

The strategy for the location of assets into these accounts must conform to the specific goals and expectations of the investor.

The Benefits of an Asset Location Strategy

Below is a list and an overview of the three main criteria of an asset location strategy. The more the below benchmarks relate to you, the better your advantages under a location plan.

  • Tax Inefficiencies of Taxable Accounts – review the amount of assets in these accounts
  • Investment Period of Greater than 10 Years – 10 years is the “rule of thumb” for any investment strategy to work
  • High Marginal Income Tax Rate – the higher the marginal tax rate, the larger the potential for an asset location plan

There are exceptions to everything, and this includes the above principles. An investor must consider present and future situations. Will there be a sharp drop in future income, or will there be a move from/to a State with high local taxes? These situations will have an effect on the strategy and the 10-year rule.

Tax Efficiency Rating

When forming an asset location strategy, an investor needs to make the decision of which assets to place in a tax-advantaged account and which to remain in “standard” accounts. Generally, the more one pays in capital gains every year, the more inefficient the investments.

Stocks tend to be more efficient if held for more than one year, and bonds tend to be inefficient. Both fixed-income investments and REITs are low on the tax-efficiency scale.

Mutual funds are more complex. Traditionally, large-cap funds prove more efficient than smaller-cap funds. However, tax-efficient funds are highly managed, meaning higher fees.

Enhance After-Tax Returns

This is the overall goal of an asset location strategy. With the guidance of a financial advisor who understands the goals, the tolerances and the expectations of the investor, the tax efficiency within investments will be achieved.

The key is to weigh the value of the tax efficiencies against the fees of the highly-managed funds.

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