asset location

Asset location is the choice of where to hold each investment: in a taxable account, a pre-tax account like a traditional IRA or 401(k), or a Roth account. It is different from asset allocation, which is how much you hold in stocks, bonds and cash. Allocation is what you own. Location is where you keep it.

The tax rules differ by account. The IRS says a lower tax rate may apply to net capital gain than to ordinary income, and that net short-term gains are taxed as ordinary income. It also says qualified Roth distributions are tax-free if you satisfy the requirements. Money taken from a traditional IRA is generally taxed as income.

For example (illustration only, not advice): an investor holds a fund that creates a lot of taxable income each year. Held in a taxable account, the investor owes tax each year. Held in an IRA, that yearly tax does not apply, though withdrawals are taxed later. A different holding might fit better in the taxable account. The right mix depends on your whole plan.

Why it matters: it can lower tax drag without changing what you own. It also interacts with giving, Roth conversions and your required minimum distributions. Ask your CPA and advisor to look at all accounts together.

Read about our tax planning approach.