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ABOUT Thomas

Thomas Vance is an Investment Advisor Representative with Pure Financial Advisors. He has been working with individuals, families and business owners since 1993. In his role with Pure Financial Advisors, Thomas works directly with clients to help them accomplish their financial goals, specializing in the areas of retirement planning, tax planning, estate planning and investment [...]

As investors, we’ve all heard of asset allocation, but asset location can be just as important. In this video, Thomas Vance, CFP® of Pure Financial Advisors explains how holding certain asset classes in specific types of retirement accounts can enhance your overall portfolio returns by reducing how much you pay in taxes.

Transcript:

Hi I’m Thomas Vance, CERTIFIED FINANCIAL PLANNER™ with Pure Financial Advisors with your question of the week. So the question of the week that I want to focus on today is asset location. As investors we’ve all heard about asset allocation, but an equally important topic is asset location and the concept there is should you invest each pool of money in your portfolio in the same way?

So let’s take as an example if you want to have a portfolio that’s fifty percent stocks and fifty percent fixed income. So a balanced portfolio. Should you invest your IRA pool of money, your taxable pool of money, and your Roth IRA the same way? It’s a very important point that a lot
of investors overlook. So what I want to talk to you about is that asset location concept.

So let’s take as an example your money that’s your IRA money. It’s obviously your longer-term money. Most people think of it as money that they’re going to touch down the road. Investors tend to take more risk with that money
and want to focus more on growth with portfolio. And then conversely, a lot of investors will look at their taxable pool of money as shorter-term money that they may need here in the short term and so they tend to take less risk with that money and focus more on fixed income, interest-bearing accounts, dividend producing stocks and things like that.

Let’s take a step back just a moment and look at the tax rates that each of those pools of money has. Your IRA money is going to be taxed as ordinary income. If you focus your IRA money in a growth perspective, you’re going to be taxed as ordinary income on that pool of money. Your taxable full of money however, you do have access to a special tax rate called long-term capital gains, and for most investors that’s only at fifteen percent so that tends to be a lot lower than what your ordinary income tax rate would be. And so if you take a look at your portfolio and take a step back from it, think about what assets you’re putting in each pool, even though your overall goal may be a fifty percent equity and fifty percent fixed income, you may want to actually focus your your growth in your taxable pool so that you can take advantage of fifteen percent tax rates which would be the long-term capital gains, and then put more of your fixed income or your dividend producing
stocks in your IRA pool, which would be subject to ordinary income anyway.

If you pay attention to that as an investor that’s a very important point because you may actually be able to enhance your overall return, and thereby
help to enhance your overall portfolio return by paying attention to the tax
rates that each pool of money will have For more information check out our other video blogs here at Pure Financial. I’m Thomas Vance and that’s your question of the week.