Asset Location is a key strategy to employ for tax efficiency and minimization
It is a standard strategy, built into our trading platform and client communication process, here at Janiczek Wealth Management.
It’s easy to confuse asset allocation with asset location. Asset allocation is a strategy implemented to balance risk versus reward by diversifying across different investment asset classes based on an individual’s time horizon, risk tolerance, and goals. Asset location is about what assets are held and traded in different types of accounts. For instance, if half of your portfolio with us is in qualified tax-deferred accounts and half of the assets are in fully taxable semi-liquid accounts, we would purposely hold and trade different types of holdings in the two different types of accounts for your potential economic benefit.
One simple example is holding tax-free municipal bonds within your taxable account(s) and taxable corporate bonds in your IRA(s) or other tax deferred qualified accounts. But that’s Asset Location 101. The real art of tax location strategy comes into play when we are trading and rebalancing portfolios. If, for instance, your allocation of large cap growth stocks exceeded a certain threshold, and we were able to sell a portion of your large caps in your IRA versus your taxable account, we could achieve the rebalance objective with zero taxation. This is asset location savvy trading, a feature we like to take advantage of when we can.
To properly implement asset location strategies, it is critical to have all holdings monitored and managed in a single aggregated system – regardless of how many accounts or custodians are involved. In our particular situation here at Janiczek Wealth Management, our sophisticated monitoring and trading system is literally designed and programmed to assist in such asset location tactics. In other words, certain asset types are emphasized to be held in certain types of accounts over others and this hierarchy is utilized in the buying and selling process when possible.
Beyond the asset location basics, it is critically important for you to keep us updated on potential major transactions going on in your life outside of our portfolio management. For instance, one year, we were planning to execute major rebalancing of an asset class that greatly appreciated across practically all client accounts. In that same year, several clients had decided to sell second homes and invest the proceeds into their portfolio accounts. Because we knew about the pending sales, we were able to execute rebalancing strategies accounting for external real estate and cash infusion transactions. In short, rebalance objectives were achieved with a fraction of the taxes otherwise necessary. All because of asset location and superb proactive communication with the clients.
Asset location is a strategy many investors are not even aware of and one many advisors are not ideally equipped to execute upon. The next time you conduct a Clarity Session with us, be sure to discuss asset location strategies with us. We can give your precise examples within your account when and where it is used.