It may be time to revisit your asset location strategy.
Over time, it’s common to accumulate financial accounts without having a plan to coordinate and balance how they’re taxed—now and in the future. This could affect the value of your investments and undermine your efforts toward achieving your financial goals.
An asset location strategy takes into account the intended purpose of your assets and provides an analysis of how/if those assets should be ‘relocated’ or utilized in other accounts with different tax treatments. An asset location strategy can be as important as asset allocation, as it gives you a clear picture of all your assets.
Classifying your accounts and account types
The first step in developing an asset location strategy is to classify your various financial accounts. Most people own a mix of taxable accounts such as savings or brokerage accounts, tax-deferred accounts, such as workplace retirement plans and Individual Retirement Accounts (IRAs), and tax-never or tax-free accounts, which can include life insurance and donor-advised funds.
Using the table below, we categorized assets by account types that focus on the theme of "now," "later" and "never" for both the use and taxation of those assets.