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“Tax Smart” Asset Location

October 4, 2012

Consider being as “tax smart” as possible in locating or positioning your investments.


Some essential points to consider first:


  • Long-term capital gains and dividends are taxed favorably
  • Interest from tax-exempt bonds is not taxed
  • Interest yields are greater from corporate bonds that have comparable ratings and terms than from tax-exempt bonds
  • All income earned in a tax-deferred account such as an IRA or 401k is taxed as ordinary income when distributed, regardless of the nature of the income in the IRA
  • Capital gains on stock owned when you die escape taxation
  • Capital gains on stock donated to a charity escape taxation but your charitable donation will be for the full value of the      stock (including the untaxed gains)


A bad “strategy” is one where an investor has stock in a tax-deferred account, and tax exempt bonds in their own name.  A good or corrective strategy is one that owns corporate bonds in the tax-deferred account and stock in your own name.  Your overall yield will increase and the stock will provide capital gains and dividends that will be favorably taxed.


If you are an active trader hopefully generating extensive short-term gains or if you trade or sell options, you should use your tax-deferred account to delay the tax payments.  The deferred tax will also provide you with additional funds to trade with.


Many people with a carefully planned asset allocation believe each account should have the same asset allocation percentages.  This is not so… as long as the total of your investments is in sync with the allocation plan. You should look at all your accounts in the aggregate and locate the stocks and bonds in the most tax-efficient manner.  Also, keep in mind the charity and estate benefits of owning appreciated stock individually.


Optimum situations are not always available.  If your asset allocation calls for 75% in stocks, half your funds are in IRAs and half in your own name, then obviously you will need to invest some of the stock money in the IRA.


Nothing can be perfect, but you should try to position your investments to be as “tax smart” as possible by well-organized asset location.

3 Comments leave one →
  1. October 4, 2012 5:38 pm

    Very simple, but powerful strategy. More investors need to realize the tax impact on their investments.

  2. October 4, 2012 8:20 pm

    Taxes are a major factor in investing. No home runs, but you can hit a lot of singles.

  3. October 4, 2012 8:28 pm

    As you pointed out in your last “blog” which summarized current and possible 2013 tax rates, dividends are currently favorably taxed, but may not be in 2013 (unless Congress gets its head screwed back on).
    From a friend.

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