Looking to Lower Your Taxes? Learn About Asset Location from Anastasia Wiese
Most investors already know: You only get to pocket your after-tax investment returns. Far fewer investors know about asset location, an important technique for investing as tax-efficiently as possible. In an August 31 Grand Rapids Business Journal column, Anastasia Wiese, JD, CFP® explained how asset location helps minimize the impact taxes have on your investment portfolio.
On the surface, asset location is simple enough: Stash your least tax-efficient holdings in your tax-sheltered accounts to reduce taxes owed over your lifetime.
That said, the details can be more daunting.
First, there is only so much room in your tax-sheltered accounts. Often, you must consider challenging tradeoffs to make best use of your tax-sheltered “space.” For example, typically, but not always, holdings such as fixed income and real estate investment trust (REIT) mutual funds are less tax-efficient than stocks. Therefore, it might be reasonable to hold them in a tax-favored account such as a traditional IRA.
In addition, tax-planning is rarely your only consideration as an investor. Other factors – such as your estate planning and retirement spending goals – may sometimes override an optimal asset location plan. More tradeoffs!
In short, it can be both an art and a science to minimize your taxes owed through ideal asset location. Since it can literally be worth it to learn more, we recommend reading Anastasia’s entire article here.