Course 505: What Goes Where? The Art of Asset Location
Why is asset location such a sticky wicket?
In this course
1 Introduction
2 Why is asset location such a sticky wicket?
3 Tax-Sheltered Accounts = High Returners With High Tax Costs
4 Taxable Accounts = Higher Returners With Low Tax Costs
5 Either Account = Lower Returners With High Tax Costs

For one thing, the tax treatment of investments changes frequently, so what might be an optimal asset placement today might not be a few years from now.

Dividends provide a great case in point. Prior to 2003, income from stock dividends was taxed at the ordinary income tax rate, so you'd generally want to hold income-rich stocks in your tax-sheltered accounts. But when dividends began to be taxed at the lower capital gains tax rate, they were no longer verboten for taxable accounts.

In addition to tax treatment confusion, practical considerations sometimes completely contradict advice that makes good tax sense. When we're in accumulation mode, most of us naturally use our retirement accounts (401(k)s and other company-retirement plans and IRAs) as a storehouse for our longest-term savings, so it's only logical that we'd be inclined to invest in long-term assets (namely, stocks) there.

Meanwhile, from a practical standpoint it's logical to want to hold more safe, stable, and liquid assets (namely, bonds and cash) in accounts that we can readily tap without strictures or penalties--our taxable accounts. Yet as much logical sense as those asset-placement arrangements might seem to make, they precisely contradict what a tax advisor would tell you to do. Because income from bonds and cash is taxed at your ordinary income tax rate, that's a powerful argument for holding bonds in your tax-sheltered accounts while keeping at least some stocks in your taxable account.

There are no one-size-fits-all solutions, and it's worth revisiting your asset-location framework every few years, to make sure your plan syncs up with the current tax rules. But here are some general guidelines.

Next: Tax-Sheltered Accounts = High Returners With High Tax Costs >>


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