Understanding Asset Location: Where You Put Your Money Matters

Transcript

Hi, I’m Brent with Scottsdale Wealth Advisory. You’ve probably heard of asset allocation. That’s how your money is divided between investments like stocks, bonds, and cash.

But just as important is something most people don’t think about, and that is asset location. That’s not what you invest in. It’s where you hold those investments, and it can make a big difference in how much you pay in taxes and how efficiently your money works for you in retirement. Let me walk you through what that looks like. 

Understanding Different Retirement Account Types

You probably have a few different types of accounts:

• Accounts like a traditional IRA, a 401(k), maybe a 403(b), all of which are considered tax-deferred.
• A Roth IRA, on the other hand, is considered tax-free. 
• You might have a brokerage account or a bank account, which is considered taxable or non-qualified. 

Each of these is taxed differently, and certain types of investments are a better fit for certain types of accounts.

Matching Investments to Tax Categories

Here’s a simple way to think about it. Investments that create ordinary income, like CDs, bonds, or annuities, are often best placed in tax-deferred accounts, like an IRA. So you can delay paying taxes until you withdraw that money.

Investments subject to capital gains, like stocks, ETFs, or mutual funds, may be better suited for a taxable brokerage account, where you can take advantage of lower capital gains rates and perhaps tax-loss harvesting.

And if you have tax-free Roth accounts, those are ideal for assets with strong growth potential, since all future growth and withdrawals could be tax-free.

Where Annuities Fit in Your Retirement Plan

Now, where do annuities fit? It depends on the type. But in many cases, fixed or fixed indexed annuities can be used inside IRAs as part of the conservative, safe accumulation, or income-producing portion of your plan. Because a gain within an annuity is withdrawn and taxed as ordinary income, this makes them a great fit for tax-deferred accounts. 

That said, non-qualified annuities, meaning annuities funded with after-tax money, can also be useful outside of retirement accounts, especially if you’re looking for tax-deferred growth, as there is no 1099 issued unless you request a withdrawal of the interest earned.

Using Annuities to Manage Taxable Income

Therefore, you have more control over your taxable income with an annuity than you do in a money market or even a certificate of deposit. The key is understanding what you’re trying to accomplish and then choosing the right account to hold the right type of investment.

Why Asset Location Can Impact Retirement Outcomes

Asset location is one of those behind-the-scenes strategies that can quietly improve your retirement income plan without requiring more risk, and when paired with good asset allocation, like we covered in an earlier video, it can help you keep more of what you’ve earned.

Evaluating Your Current Strategy for Tax Efficiency

If you’re not sure whether your money is in the right places or if there are ways to improve your tax efficiency, I’m happy to take a look and talk through it with you. Thanks for watching, and stay tuned for more ways to build a smarter retirement plan.