What is Asset Location and Why Does It Matter?

Transcript

When it comes to retirement planning, many individuals are faced with the question of how important asset location is in the accumulation phase. For those who are still 15 to 20 years away from retirement, it can be difficult to determine whether to focus on building wealth first and then worry about asset location later, or if asset location should be a priority from the start.

Asset location is indeed important, but it can also evolve over time as individuals go through their financial journey. I suggest visiting moneyguy.com for resources and learning more about the Financial Order of Operations, which will help individuals understand their options when it comes to asset location.

By the nature of the way the government incentivizes tax savings, individuals will often find that they first have taxable emergency reserves, then tax-free Roth assets, and finally a good chunk of tax-deferred assets. As individuals reach higher tax situations, they may also want to prioritize putting money into tax-deferred accounts.

However, as individuals reach critical mass in their asset accumulation, they may find that they have too much money in tax-deferred accounts and not enough after-tax money. This is where the “three bucket strategy” comes into play, which Bo talks about in greater detail.

Asset location is simply about deciding what types of investments to house in which types of accounts, as each account is treated differently by the government. By having more conservative assets in pre-tax accounts and high-growth assets in Roth accounts, individuals can optimize their portfolios and reduce the tax drag on their investments, ultimately increasing the amount of dollars they keep over the long term.

In conclusion, asset location is important but does not necessarily change an individual’s overall investment strategy. Small optimizations and adjustments to the way investments are housed can have a significant impact over the long term, reducing tax drag and increasing the amount of money kept.

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