TAXES
Asset Location vs. Asset Allocation: Why Where You Hold Investments Can Matter
From the Book
Two-Comma Wealth: Investment, Tax, and Estate Strategies to Consider When Your Net Worth Exceeds a Million Dollars
By George Stefanou, CFP®, CPWA®, CEPA®
Chapter: Chapter 5: Navigating Taxes for Two-Comma Wealth
Section: Asset Allocation Versus Asset Location
Excerpted from Two-Comma Wealth: Investment, Tax, and Estate Strategies to Consider When Your Net Worth Exceeds a Million Dollars.
Published-Book Excerpt / Educational-Use Note
The following material is excerpted from Two-Comma Wealth. Ellipses indicate where portions of the published text have been omitted for length, relevance, or durability. Financial, tax, retirement, Medicare, estate, business, legal and investment laws, rules and conditions can change over time. Any time-sensitive thresholds, limits, ages, tax brackets or regulatory references should be verified against current official sources before applying a strategy. This material is educational and is not individualized investment, tax, legal, insurance, Medicare, valuation or transaction advice.
“In financial planning, there are two big concepts: asset allocation and asset location.
Think of asset allocation as choosing the investment lane you’re driving in—stocks, bonds, real estate, etc. Each serves a different purpose, whether it’s for growth or income generation.
Asset location, on the other hand, is all about which road you choose to drive on. Are you taking the turnpike (tax-deferred accounts), the scenic back road (tax-free accounts), or the toll road (taxable accounts)?
Each one has different tax implications, and your goal is to make sure you’re taking the most efficient route for your situation.”
“Think of asset allocation as choosing the investment lane you’re driving in… Asset location, on the other hand, is all about which road you choose to drive on.” — George Stefanou
What Is the Difference?
Asset allocation generally refers to how a portfolio is divided among different types of investments and risk characteristics.
Asset location asks a different question: Which account type holds which investments?
Depending on current tax law and an investor’s circumstances, taxable accounts, tax-deferred retirement accounts and Roth or other qualifying tax-free accounts may create different tax consequences.
As a result, two investors could own similar investments but experience different after-tax outcomes depending on where those investments are held.
Tax considerations should be evaluated alongside investment objectives, risk tolerance, liquidity needs, time horizon and current law. Tax considerations alone should not determine whether an investment is appropriate.
Questions to Consider
Are your accounts being considered as one coordinated portfolio or as unrelated accounts?
Which investments are generating taxable income today?
Which assets are intended primarily for current income versus long-term growth?
Could future withdrawals or required distributions change the appropriate account location?
Is asset location reviewed when tax rules or personal circumstances change?
Continue Exploring
Roth Conversions Before RMDs — How conversions before required minimum distributions begin may affect future taxable income and retirement planning.
IRMAA and Roth Conversions — Why Roth conversions should be coordinated with the income thresholds used to determine Medicare premiums.
The Investment Highway — How cash, income, growth and aggressive-growth investments can serve different purposes within a coordinated portfolio.
About George Stefanou, CFP®, CPWA®, CEPA®
George Stefanou is the author of Two-Comma Wealth and founder of Stefanou Wealth Management. A financial advisor since 2009, George writes about investment strategy, retirement income, tax-aware planning, estate and legacy considerations, business transitions, and the financial decisions that often become more complex after wealth reaches seven figures.
Through Two-Comma Wealth, George shares educational perspectives intended to help readers better understand how financial decisions can interact as wealth grows.