Saving for retirement isn’t just about how much you put away—it can also help to consider where you put your investments. This is called asset location, and it’s another tool many financial planners utilize to help individuals reduce their tax burden. Different accounts have different tax rules, and placing the right investments in the right accounts can make a big difference over time.
Understanding Asset Location
Asset location means deciding which investments to place in tax-advantaged accounts (like IRAs and 401(k)s) and which to keep in taxable accounts.
- Tax-advantaged accounts (Traditional IRAs, Roth IRAs, and 401(k)s) allow your money to grow tax-deferred or tax-free.
- Taxable accounts (regular brokerage accounts) require you to pay taxes on interest, dividends, and capital gains each year.
Tax-Efficient vs. Tax-Inefficient Investments
Some investments create more taxable income than others. According to Schwab, tax-efficient investments—like stocks that don’t pay high dividends—are best for taxable accounts because they don’t generate much taxable income each year. On the other hand, tax-inefficient investments, like bonds and real estate investment trusts (REITs), should go into tax-advantaged accounts to avoid yearly tax bills.
Why Asset Location Matters
Vanguard’s research found that a good asset location strategy can increase after-tax returns by 0.05% to 0.3% per year—a small percentage that adds up significantly over time.
Final Thoughts
By carefully considering which accounts hold different investments or asset classes, you can take another step toward making your hard-earned money work for you. This strategy takes planning, but over time, it can make a meaningful difference. Talking to a financial advisor can help you create the best approach for your goals.
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Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.
