This week’s theme on the Retirement Quick Tips Podcast is: Maximizing Net After Tax Returns In Your Investment Portfolio
Today, I’m talking about asset location 101.
Asset location, not to be confused with asset allocation, refers to which types of investments you own in different account types.
You would never own a tax free municipal bond in an IRA account, because that negates all the tax free income benefits from that bond. Likewise, you should avoid investing in high turnover mutual funds and REITs (real estate investment trusts) in taxable accounts, since they’re way more inefficient when it comes to how those are taxed. So those are best placed in IRA or Roth accounts, where you won’t be penalized for owning these types of tax inefficient investments.
Asset location also refers to keeping more growth oriented investments inside of Roth accounts. Since those accounts you’ll usually tap into last in retirement, they’ll be invested for the longest period of time. So the Roth should be the most aggressively invested of your accounts, in order to maximize the tax-free growth and the usually long time horizon of that account.
Essentially, asset location is about investing in the right investments within the right accounts. That's because different types of investments have different tax rules, and different types of accounts have different tax treatments as well.
Being tax efficient can increase your lifetime returns significantly, so it’s a very important step when selecting investments that most people, especially most DIY investors fail to consider.
That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast.
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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance