Tax‑Efficient Asset Location Explained
Discover how strategic asset location can improve your portfolio’s tax efficiency and overall returns, with guidance from Ron McCoy.
Asset location is a critical yet often overlooked component of precision investment planning. For high-net-worth individuals and institutional investors, the strategic placement of assets across taxable, tax-deferred, and tax-exempt accounts can significantly boost after-tax returns without increasing risk. Ron McCoy emphasizes that it’s not just about what you invest in—it’s also about where you hold those investments.
What Is Asset Location?
Asset location involves distributing investments across different types of accounts to optimize tax efficiency. While asset allocation focuses on what you own (stocks, bonds, alternatives), asset location determines where those assets are placed for maximum after-tax benefit.
Source: Morningstar – Asset Location: The Overlooked Tax Strategy
Why Asset Location Matters
Placing the right assets in the right accounts can:
- Improve net returns by 0.5%–0.75% annually (Morningstar, 2023).
- Minimize tax drag on growth investments.
- Maximize tax benefits from income-generating assets.
Case Study: Boosting Returns by 0.6% Annually
A physician with $3M split across taxable brokerage, a 401(k), and a Roth IRA restructured her portfolio by placing municipal bonds in taxable accounts, equities in tax-deferred accounts, and high-growth stocks in the Roth IRA. Over 10 years, she improved her after-tax returns by nearly 6%—without changing her investment strategy.
Best Practices for Asset Location
Ron McCoy’s precision approach focuses on these core principles:
1. Tax-Efficient Investments in Taxable Accounts
Investments like municipal bonds, index funds, and ETFs are ideal here because of their lower tax footprint.
2. Tax-Inefficient Investments in Tax-Deferred Accounts
Hold high-turnover funds, REITs, and taxable bonds in IRAs and 401(k)s to defer taxes until withdrawal.
3. High-Growth Assets in Tax-Free Accounts
Place small-cap growth stocks and other aggressive investments in Roth IRAs to maximize tax-free growth potential.
Actionable Tips for Investors
- Review Annually: Tax laws change. Regular reviews ensure continued optimization.
- Mind Contribution Limits: Stay aware of IRS contribution caps for tax-advantaged accounts.
- Coordinate with Your CPA: Align asset location with your broader tax strategy for maximum efficiency.
Ron McCoy’s Expert Perspective
Ron’s holistic planning ensures asset location strategies complement overall investment goals. His fiduciary mindset prioritizes maximizing your wealth’s staying power with precision tax planning at every stage.
