The Benefits of Asset Location | Mission Wealth

hi I’m Karen Osborne Chief investment officer at Mission well and in this video we’ll cover the benefits of asset location while asset allocation involves the optimal portfolio mix across asset classes asset location focuses on how to most tax efficiently distribute those asset classes amongst different account types since different account types have different tax considerations by incorporating asset location into our investment process we can help maximize the after-tax returns for our clients student client-specific requirements such as short-term cash needs May dictate to and extend what assets to hold and in what accounts however generally speaking we are able to invest more tax efficiently by taking asset location into consideration so how does asset location work let’s say you have three investment accounts within your broad Investment Portfolio the first is a taxable account such as an individual joint or trust account the second is a Roth IRA and the third account is a traditional IRA within the scope of this broad portfolio which might have an overall Target allocation of say 60 stocks and 40 bonds we can incorporate asset location by optimizing which assets we choose to hold and in which accounts to help minimize taxes paid and maximize after tax returns let’s consider the different tax considerations of each account and the implications for investing a taxable account such as an individual joint or trust account pays taxes on any ordinary income generated within it to minimize tax implications we generally prefer to tilt the fixed income allocation of a tax law account towards tax-free municipal bonds which shelter the account from tax liabilities we also position taxable accounts towards higher growth assets like stocks that either do not generate taxable income or generate qualified dividend income which is taxed at a much more favorable long-term capital gains rate taxable accounts also offer us the opportunity to tax loss Harvest where appropriate which may further enhance the after-tax returns for our clients a Roth IRA is a tax-free retirement account contributions to a Roth IRA come from after tax money meaning taxes have already been paid and no further tax is needed that means you don’t have to pay taxes on any future distributions after retirement as a result we typically want to allocate roths to high growth assets like stocks to maximize the growth potential and increase the value of the account as much as possible since future retirement withdrawals are not subject to taxes additionally since any income generated in a Roth is tax-free we can tilt towards high growth assets that may be less tax efficient and generate higher levels of ordinary income whereas a Roth IRA is funded from after tax money a traditional IRA is funded from pre-tax money traditional IRAs are deferred tax accounts you pay taxes on future distributions from the IRA at your future marginal income tax rate however any income generated within the account along the way is tax-free for this reason we typically tilt IRAs towards High ordinary income generating assets such as payal bonds or other high income alternatives when faced with a decision to locate growth assets such as stocks across the different account types it’s typically better to prioritize allocating high growth Assets in a Roth since that minimizes expected future taxes then to a taxable account since any future distributions on a taxable account are likely to be taxed at long-term capital gains rates and lastly to a traditional IRA since future distributions will be taxed at your future marginal tax rate and thus incur the largest tax burden studies show that incorporating tax efficient investing like asset location into an Investment Portfolio can add point four one percent of additional performance benefit annually a game specific client circumstances May dictate asset location to a degree but generally speaking by incorporating asset location and tax considerations into our client portfolios we may ultimately help maximize their after-tax returns [Music] thank you