Tax-Deferral Strategies and Asset Location

Asset location is the choice of where to hold your investments. If you have an individual brokerage account, a qualified retirement account, and a ROTH IRA, how do you know which account should hold which assets? Most populace, and even most advisors, do not consider asset location when developing an investment plan. In fact, most do not even have an investment plan. Repeatedly, the only question of concern is ‘what’ to hold in your portfolio, not ‘where’ to hold it.

But asset location can make a discrepancy in the long-term outcome of your complete portfolio. Andrew Corbman specializes in working with clients to help them in developing tax-deferred retirement income strategies, retirement income planning, and protecting their assets for their heirs.

There are three tax ‘buckets’ for your investments; tax deferred, taxable, and tax-free.

  • Tax-deferred – You obtain a tax deduction now, invest with pre-tax dollars, and you do not pay tax on the earnings until you extract it. These investments are in your qualified accounts such as a 401k, Traditional IRA, annuities, etc as well as Pension Plans. There are limits to how much you can give, and you are required to take the money out at age 70.5 and pay the taxes.
  • Taxable – After-tax dollars, you pay tax now and invest with, and you also pay tax on all the earnings as they are received. These investments are in your non-qualified accounts such as your CDs, savings, stocks & bonds, etc.
  • Tax-free – You pay tax now and never pay taxes on the return. This is your state muni-bonds, ROTH IRA or in your life insurance (cash surrender value). There are confines to the amount you can contribute, whereas the life insurance contributions can be much higher.

Some common investment types that can be used in tax-deferral strategies.

  • Growth – Growth stocks are companies that have significant potential for growth in the estimated future.
  • Income – Income stocks can be used to enhance fixed-income portfolios with dividend yields that characteristically exceed those of guaranteed instruments such as CDs or treasury securities.
  • Value – Value Stocks are usually underrated companies that often provide long-term profits.
  • Appreciation – Appreciating assets can be Growth or Value Stocks, but are also non-liquid assets such as art, real estate, etc.

Tax Planning with Asset Placement

You can reduce your taxes now and in the future by strategically placing certain investments in the diverse tax buckets. Assets that produce current income may be best apprehended in your tax-deferred accounts so that the income can be reinvested before taxes.

Holding appreciating assets in your tax-deferred accounts transfer capital gain income into ordinary income, mounting your taxes. Holding very appreciating assets, and even high income earning assets in your tax-free accounts, will save you the most taxes, but there are restrictions to how much you can put into those accounts, and what kind of assets you can hold. (For instance, you cannot hold real estate in your life insurance policy).

Each strategy depends on your specific needs, goals, tax situation and risk tolerance. According to Andrew Corbman , careful planning should be done, not only at year-end, but all through the year to find the best policy that is customized for you individually.