CMP Financial Planning

The Art of Asset Location


The Art of Asset Location

While academic research has shown that no manager can beat the market (not even on Wall Street!), we can, in effect, improve our returns by reducing taxes on our investment income and gains! Christine Benz has done a nice job of discussing this topic in her article What Goes Where? The Art of Asset Location, www.morning star.com, 2011-03-14. While some effort is necessary initially to position your investments stragetically, once in place, the ongoing effort required is less. But do be sure to monitor, as tax laws have been known to change.

The assett placement decision revolves around the taxation of taxable versus tax-sheltered accounts. In a nutshell, because you don’t have to pay taxes from year to year on income and capital gains in tax-sheltered accounts like IRAs and 401ks, these are good receptacles for higher-returning investments, such as bonds and REITs, which also have heavy tax consequences. By contrast, stocks and stock funds are generally a better bet for taxable accounts, since capital gains are taxed at a lower rate and, importantly, investors can exert control over when the gains are taken. Also, if you still own high-turnover funds that churn through their portfolios, this to omay be a better candidate for a tax-deferred account. Note that at this time, the tax treatment of dividend income is set to expire at the end of 2012.

By Christina Povenmire