Diversifying your portfolio is always important, but knowing which accounts to place the highest risk/return assets could prove to benefit you more over the long run.

Asset Location is the theory that you should have your highest return assets in the accounts that you will pay the least amount of tax on. The converse is then also true – if you have a safe asset, it would be wise to put those in tax-deferred accounts in order to have higher proportional growth in tax-advantaged accounts. It’s a simple theory, but it is not practiced very often.

To best implement this procedure, you should put your highest risk/return assets in your Roth IRA, Health Savings Account, and brokerage account – in that order. You will never pay tax on any growth or distributions from a Roth IRA (unless you take an unqualified distribution before 59 1/2). That makes the Roth IRA the single best place to have the highest long-term growth in your portfolio. Health Savings Accounts are second on the list because you can take money out tax-free if you have had qualified medical expenses. Brokerage accounts are also a good place for high return assets because your capital gains rate is generally around half of your individual income rate and can sometimes be 0% for individuals with less than $50,000 of taxable income.

Bond funds and your safer assets (non-cyclical stocks, international developed stocks, etc) should remain in your Traditional IRA and 401(k). This also helps to avoid paying tax on the interest payments and non-qualified dividends that are both taxed at your ordinary income tax rate if the assets were to be held in a brokerage account.

The most important benefit of asset location is that you will be strengthening your tax situation for retirement through higher proportional growth of tax-advantaged assets versus tax-deferred assets.

When you have paid taxes all of your life, there is nothing better in retirement than sitting on a large Roth IRA that has no IRS strings attached. Asset location helps you keep more of your money growing now and gives less of it to the IRS later.

Written by Garrett Gould

Garrett Gould is a remote financial planner who specializes in long-term tax management. He is the co-owner of Halyard Financial and advises individuals, families, and small business owners throughout the nation. Garrett is an Enrolled Agent with the IRS who has passed all three of the CFA exams and has been creating financial plans for several years. Garrett is located on the Upper West Side in New York City.

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