Asset Location in Investment Portfolios Charlotte NC

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Location, location, location—that’s what it’s all about in real estate, and in retail and other traffic-sensitive businesses. But how important is the location of assets within an investment portfolio?

For some investors, the question crops up each year when it’s time to rebalance a portfolio and/or invest newly saved funds. They want to know whether to make a new investment in a traditional retirement account, invest through a Roth account or hold it outside of tax-advantaged accounts altogether.

Some financial planners disagree on how important asset location is, and highly respected financial advisers have come to opposite conclusions about where certain asset classes should be placed. Many investment advisers don’t consider it at all, despite the potential effect on after-tax returns. So, here are a few ideas to get you started thinking about it.

Understanding the tax issue

The first thing to understand about asset location is that it’s a tax issue. If all accounts and all investment yields were taxed the same way, it wouldn’t make much difference where individual investments were held—indeed, there wouldn’t be as many choices.

Congress has used tax policy to encourage people to save and invest money and to plan for future needs, such as retirement, college tuition and medical care. As a result, under current U.S. tax law, long-term capital gains and dividends that meet certain requirements (known as “qualified dividends”) are taxed at 15 percent for taxpayers above the lowest tax bracket, and most other investment income (nonqualified dividends, interest and short-term gains) is taxed at marginal rates of up to 38 percent. Complicating matters further, some investment income, such as interest on municipal bonds, has no federal tax at all.