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DiMeo Schneider & Associates

Financial Planning

Asset Location

December 11, 2019

As the old adage goes for real estate, “location, location, location.” The same can be said for the importance of where certain asset classes are held in an investment portfolio.

Why is this the case? The taxation of portfolio income varies by asset class: taxable bond and REIT income is taxed unfavorably at ordinary income rates, while equity dividends are taxed favorably at lower qualified dividend rates. An investor who has a combination of taxable accounts, Traditional 401(k)/IRAs and Roth 401(k)/IRAs can optimize a portfolio’s allocation to minimize tax drag thus enhancing long-term after-tax returns.

In order to better optimize a portfolio’s allocation, it is helpful to understand which asset classes are more tax-efficient than others.

The next step in the optimization process is reviewing which accounts types comprise the overall portfolio. For many investors, a portfolio may consist of a handful of taxable accounts (individual, joint, trust, etc.), Traditional 401(k), Traditional IRAs, Roth 401(k) and Roth IRAs.

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