Here’s a wonky-sounding phrase: “asset location.”
But the meaning is simple – and important. Asset location refers to the type of accounts you use to hold investments in stocks, bonds and cash in order to reduce the drag of taxes. It’s something to consider during the years when you accumulate savings, and also after you retire and draw down funds.
Joining me on the podcast this week to explain asset location is Christine Benz, director of personal finance for Morningstar and senior columnist for Morningstar.com. In that role, Christine focuses on retirement and portfolio planning for individual investors. She also co-hosts Morningstar’s podcast The Long View, which features in-depth interviews with thought leaders in investing and personal finance.
The idea with asset location is that you’re being thoughtful about which types of assets you put in which types of accounts- tax-deferred, Roth and taxable accounts. The fit of these account types from a tax standpoint can make a difference in how much you keep or pay in taxes. It is one of the things about investing and saving that you can control, at least a bit – so it’s worth doing.
A key element of this is tax diversification during your accumulation phase – making sure you don’t have all of your assets in one basket. Most of us accumulate in 401(k) accounts, but Christine lays out ways to diversify along the way, such as using a Roth K option. Then, we shifted our discussion to what people who are near retirement, or already retired, can do to diversify.