May 16, 2014


Brian and Bo discuss the strategy behind asset location and give you a breakdown of their thoughts when designing investment portfolios. The guys give you the rundown on tax-efficiency and cover the three “pots” of money in the investing world 1) Taxable 2) Tax-Deferred 3) Tax Free.

Here is the overview of how the tax game works across the different investment accounts:

Taxable Accounts – Traditional brokerage accounts (Individual, Joint, Tenants in Common, Tenants by the Entirety, and certain Trusts). This is where you see short-term and long-term capital gains taxation as well as special tax treatment for qualified dividends. We like to see long-term investments, muni bonds, and holdings that generate qualified dividends in these accounts.

Tax Deferred Accounts – This is your 401k, 403b, other employer sponsored retirement plans, and non-Roth IRA’s. When contributions are made into these accounts you get an income tax deduction, and the assets grow tax deferred until you pay ordinary income tax upon taking distributions. The best holdings for these accounts are investments that generate income, like bond holdings, certain MLP’s, REITS, and hedged securities.

Tax Free Accounts – These are the Roth accounts that you are probably continuously hearing about. Assets go into these accounts after tax and grow completely tax free if certain qualifications are met. This is where you want to hold highly appreciable assets so that you never have to pay tax on the substantial gains that you hopefully make.

Along with this topic we feel it is absolutely necessary to cover what-not-to do in these investment accounts:

First, try not to over-complicate your situation. If you need to go back to school to understand an investment, it is most likely an investment that you do not need to make.

Second, if you are already benefiting from preferential taxation inside of a retirement account, it does not make sense to hold investments that have equally preferential treatment in that same account. We often see this when people hold annuities within their IRAs.

Third, be wary of off-shore investments and private placements. Not only do you need to be considered a qualified investor, these investments are often very illiquid and can be hard to find an exact valuation. These types of investments can often be rewarding in the right situation, but generally carry more risk than your more traditional investments. This goes back to our first word of caution; do not get sold on an investment that you do not understand.



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