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25 - Investing Controllables Part 8 - Mastering Asset Location

25 - Investing Controllables Part 8 - Mastering Asset Location

March 31, 2023

Breaking It Down: The strategy of Asset Location holds significant power in determining the lifetime tax effects across various account types. Here's a quick primer on the three main account categories:

- Taxable Accounts: These are loaded with after-tax dollars, and you might be liable for taxes on any interest earned, dividends, and realized capital gains annually.

- Tax-Deferred Accounts: Examples include familiar names like 401k or IRA. These are funded with pre-tax dollars, and withdrawals after age 59 1/2 are taxed as ordinary income.

- Tax-Free Accounts: Options such as Roth 401k or Roth IRA fall under this umbrella. They're populated with after-tax dollars, but the beauty lies in their withdrawals - completely tax-free.

Why Does This Matter? Your current and potential future tax brackets can help identify which account type may be the most beneficial over time. However, uncertainty looms over the future landscape of the Tax Code. Therefore, diversifying your strategy across multiple account types gives you the agility to navigate regardless of future Tax Code amendments.

Your Next Move: Diversifying your investments across all three account types can provide a higher degree of control over your tax situation, whatever the future may unfold. For retirement assets, pondering a balanced division - 1/3 Taxable, 1/3 Tax-Deferred, and 1/3 Tax-Free - could be a prudent approach.