In today’s episode, you’ll learn more about:
- What asset location is—and why it’s different from asset allocation.
- Vanguard’s research on improving after-tax returns.
- Where different investments generally belong.
- Why Roth accounts deserve special consideration.
- Common mistakes investors make when organizing their portfolios.
- Why asset location should evolve throughout retirement.
Listen Now:
The Smart Take:
Most investors spend their time deciding what investments to own. Far fewer spend time thinking about where those investments should be held.
In this episode, Tyler Emrick, CFA®, CFP®, breaks down one of the most overlooked tax planning strategies in retirement: asset location. Using research from Vanguard, Tyler explains how placing the same investments in different accounts—taxable, traditional IRA/401(k), and Roth—can improve after-tax wealth without taking additional investment risk.
Retirement planning isn’t just about choosing the right investments—it’s also about choosing the right place to hold them.
Go Inside the Episode:
0:00 – Intro
2:35 – What is Asset Location?
4:15 – Why it Matters
6:30 – Client Example
8:49 – Best Places to Own It
Learn more about the Retire Smarter Solution ™: https://www.truewealthdesign.com/ep-45-retire-smarter-solution/
Sign up for our newsletter on our podcast page: https://www.truewealthdesign.com/podcast/
Have questions?
Need help making sure your investments and retirement plan are on track? Click to schedule a free 20-minute call with one of True Wealth’s CFP® Professionals.
Subscribe:
Click the below links to subscribe to the podcast with your favorite service. If you don’t see your podcast listed with your favorite service, then let us know, and we’ll add it!
The Hosts:
Kevin Kroskey, CFP®, MBA – About – Contact
Tyler Emrick, CFA®, CFP® – About – Contact
Episode Transcript:
Tyler Emrick:
Everyone wants better investment returns. Almost no one talks about where those returns should live. A recent Vanguard research paper found that simply holding the exact same investments in different types of accounts can improve after tax returns by up to 0.3% per year. Now, that might not sound like much, but over a long retirement, it can compound into meaningful wealth. Today, we’re talking about one of the most overlooked tax planning strategies in retirement, asset location.
Walter Storholt:
Another episode of Retire Smarter. I’m Walter Storholt alongside Tyler Emrick. He is a CERTIFIED FINANCIAL PLANNER as well as a chartered financial analyst and one of the wealth advisors at True Wealth Design. Find us online at truewealthdesign.com for more episodes, information, and to schedule a 20-minute discovery call with the team to see if you’re a good fit to work with one another.
Tyler, great episode today. Although I got to be honest, 0.3% made me close my eyes and snooze a little bit while you were doing the intro. I know you’re going to –
Tyler Emrick:
Come on, now.
Walter Storholt:
– Show us why that’s a big deal.
Tyler Emrick:
It is. It is.
Walter Storholt:
I’m identifying that because I’m sure we had some listeners go, “0.3? Okay.”
Tyler Emrick:
0.3? 0.3? Yes.
Walter Storholt:
0.3?
Tyler Emrick:
Financial advisors, right? The details matter. Efficiency matter, right?
Walter Storholt:
Yes.
Tyler Emrick:
For every million bucks, what is that? Three grand a year? So you start thinking about your… Everyone looks at their advisory fees and they look at their investment fees, as you should. You start thinking about, “All right, hey, if I’m saving a few thousand bucks here already and we’re cutting that down…” This is where we get down into some of those more, well, fun on our minds. Well, fun granularity. Maybe I get a nerd alert a little bit in this one. I don’t know.
But that granularity over time, because it might feel like picking up pennies in front of the steamroller, but you pick up enough penalties here, we got some stuff that’s really worth their while and worth value. And hey, if anyone has listened to the podcast for a period of time, anytime I can talk about tax and investments and marry them together? I mean, come on, it’s like a home run awaiting in the wind here.
Walter Storholt:
Yeah.
Tyler Emrick:
That’s –
Walter Storholt:
Well, here’s the thing, too. We’re talking about a small slice of an overall strategy. So it’s not the whole strategy is making this 0.3% difference. We’re talking about a slice of the entire strategy making the 0.3 difference. And so that’s important perspective, too. And we’re really talking about asset location. We’re talking about just changing some structure is causing these savings, right?
Tyler Emrick:
We are.
Walter Storholt:
So we’re not even talking about, really, picking the right stocks and those kinds of things.
Tyler Emrick:
Correct. Because those are two different things, right?
Walter Storholt:
Yeah.
Tyler Emrick:
Which are very… I mean, hey, we’re talking about asset location. What you’re referencing is asset allocation, which I don’t know. Us financial advisors love our pie charts. If you’ve sat with one of us, I’m sure we’ve shown you a pie chart that gives you a wonderful breakdown of your asset allocation.
But asset allocation is what you own, to your point, right? It’s what you own. It’s those individual selections. That’s great. That adds value too, but not something we’re touching on today. Asset location is, well, where do you own it? Same portfolio, different accounts. And inevitably, if we like to have our conversations rooted in some type of research so that we can help explain and quantify what are the benefits of this. And this is where we get down into that 0.3% annually of additional after tax wealth.
From a very large well-known company in the industry. I mean, Vanguard, I’m sure most of our listeners have run into that name before. So the goal here today is, hey, keep more after taxes, not necessarily increase your market returns. Increasing market returns are great, but today keep more after taxes is our big highlight.
Walter Storholt:
We’re in the penny saved as a penny earned portion –
Tyler Emrick:
We are.
Walter Storholt:
– Of the planning process here.
Tyler Emrick:
We are. We are. We are down. So our engineers, get a smile on your face. This is where we’re picking up and doing some magic, for sure. But it does matter, right?
Walter Storholt:
What did this Vanguard thing actually show, this study?
Tyler Emrick:
Yep. So what it’s doing is it’s essentially going back and saying, “What can be the value of actually paying attention to this?” Because a lot of times what we’ve run into is… And you can even ask your own financial advisor this. What we do is some advisors have set up their practice, or some families, or individuals, they manage their accounts differently, each account. So it’s not necessarily like, “Hey, my household investments are here.” It’s more about, “Hey, I got my 401k. It’s a 60/40 mix, 60% stock, 40% bonds. I got my taxable brokerage account. I do the same mix. I like the investments. I do the same. 60/40 mix there. Hey, I got this old savings account that has a bunch of money into it, that’s in cash.”
But you’re individualizing each account, kind of looking at their returns separately without realizing or taking into the account that all of those accounts, your IRAs, your Roth, your taxable brokerage accounts, they are going to be looked at from a tax perspective differently, which gives us that opportunity to say, “Well, hey, how can we be efficient about where we hold?”
A lot of advisors will actually just trade accounts individually. So there’s a lot of times where I’ll sit with a family that were considering working with us, and we’ll go down through their statements, and they’ll have the same exact investments in their Roth, their IRA, and their brokerage account. Because that’s the portfolio and the same mix of investments, so that’s the same portfolio that their advisor had recommended.
So hey, that’s great if it’s performing well. But then when we lose sight of like, “Well, do we want all those investments in certain accounts? Would we rather mix it up a little bit? Hold the same investments, but maybe your tax efficient investments are over here. Your tax inefficient investments are the ones that are kicking off dividends and interest are held over here and that protects you from a tax standpoint.” So it’s very much a very high level, thousand foot view of how we’re looking at it. Certainly, you can get very granular into each individual account, but you want to start from that, hey, thousand foot view of where it’s at and where can we pick this up at?
So the best example that I could kind of think of with this was I was having a good conversation last week with an individual and he was just talking through where his assets were and what he was invested in. And he’d had a Roth, which he was maxing out, which was great. He had his 401k, which he was putting money into. And then he had done a good job actually building up some money in a taxable brokerage account. This is generally the place that we go after our savings kind of hit a certain amount. We feel comfortable. The next place we kind of look at would be a brokerage account, which is simply just, hey, it’s a place where you can invest the money, right? Stocks, bonds, ETFs, mutual funds, whatever you like. Goal would be to get a little bit more return than just what you’re getting in a money market or a savings account.
And inside of that account, he had actually had a pretty sizable position in Verizon. And when he had brought it up, one of the things that he was leaning on much is like, “Yeah, the dividend this thing’s paying is great. That’s why I have it. No matter what happens to the stock price, I still get this consistent dividend that is coming down each year.” And he has a fairly sizable position in there. So he was getting around $6,000, a little over $6,000 a year in dividends from that account. Well, hey, you want to hand me six grand? I’ll take it. That’s not too bad.
But when I was asking him about his taxes and how much that had hit, he’s like, “Well, I’m not sure.” Well, those dividends come to his taxes every year, no matter what. They’re paid out. So he had no flexibility to say, “Ooh, I don’t want to pay taxes on those dividends yet. Let the money stay and invest it and let it stay and grow.” Verizon was paying it out, he got a 1099 each year, and then he would file his taxes.
So what that was doing when we looked at all his positions that he had had, not just the Verizon. The Verizon was a big culprit of it. I wanted to use that as an example. But these things were increasing his taxes around four grand a year, every single year. So it’s like he wasn’t seeing that on his performance report from Schwab, where it was at. Schwab was telling him this nice number, yield, dividend, investment performance, but it wasn’t showing him how much was getting ate up every single year from taxes that he had to take no matter what.
And it’s not just individual stocks. This shows up in the form of mutual funds and capital gains distributions and the like. So when we start thinking about asset location, one of the big culprits here, one of the big things that we’re looking at is saying, “Hey, if you have these taxable brokerage accounts, the investments that you hold in them can have substantial ramifications on how much taxes that you pay on a year in and year out basis.” So let’s be thoughtful about that. Let’s go into our brokerage account and say, “Hey, let’s invest in vehicles that are more tax efficient and will give us control over when and how we sell those investments and actually have to pay the taxes on it.”
So when we look at the actual practical application of this, you want to start high level, thousand foot view. What do we want from a risk standpoint? How much do we want in stocks? How much do we want in bonds? Let’s get a gauge for that, and then let’s first start at how much money we got in taxable brokerage accounts, and let’s start filling up those investment vehicles that are extremely tax efficient.
Generally, these would be exchange traded funds or ETFs, if you’ve heard that term before. I’m sure most of our listeners has. These are some of the most tax efficient investments that we could have. Individual stocks that aren’t necessarily paying a lot in dividends can be good as well. We want stocks that have what we call capital or price appreciation. That way, again, we can control when we sell it out. Things that have big distributions, whether they be dividends, interest, or capital gains distributions from mutual funds. These are the terms that you’re going to be looking for and kind of want to stay away from when we think about what do we want to house and hold in those taxable brokerage accounts.
And then, well, most of us have these big 401k plans or IRA accounts that we’ve accumulated over the years. Let’s hold our dividend producing investments, our income producing investments in those accounts. And the reason for that, Walt, is because, hey, if you have that same Verizon stock in your IRA account, and it pays the same dividend, that’s great, but it doesn’t hit your tax return every year, because the way the IRA is taxed is that money stays in there and then you don’t pay taxes on it until it leaves. So that’s more money that stays invested for you that can compound over time and adds that 0.3% that we’d be looking at over total wealth when we kind of look at that on an annualized basis.
So taxable brokerage accounts, we’re looking for tax efficient investments. In your IRA accounts, we can hold our real estate investments, we can hold our higher income producing investments, our big dividend producers, and then go in there and strategize around that. Another big account that we have, well, it’s Roths, right? I mean, that’s another one that kind of comes up from time to time. We’re always trying to get money in Roths, whether it be through Roth conversions, contributing money into Roths. And I mean, there’s a reason for that. Well, I mean, they grow tax-free.
Walter Storholt:
Right. Exactly.
Tyler Emrick:
So when we think about that asset location, the first point that we wanted to make was the tax consequences of the investments that you’re using. When we started looking down in the Roth, I think another thing kind of comes into that equation, and that is what is the expected return of your investments inside of that account? Because if we just go back to what I just said, Roth money grows tax-free. So if we can have our investments that are expected to grow the most held into our Roth, well, that’s more tax-free growth that we have. And that’s really the crux of what we’re getting at here, too, when we talk about that asset location. So if you’ve got Roth accounts, well, why would we hold a bond fund in there if we have IRA money and we could hold it in there?
So when we think about how you’re approaching this, it could be easier said than done, Walt. I mean, think about working career, right? It’s not uncommon for you to have two or three 401ks out there. Maybe you’ve saved in a Roth, you got a savings account, you got your taxable brokerage account. So as you start thinking about all these accounts you have, well, heck, it’s a lot of work and can be very hard to make sure that you’re being very efficient and paying attention to your asset location across every single account.
So you want to kind of keep that into consideration. And as you think about why some individuals are working with financial advisors is they’re wanting that efficiency, they’re wanting to pick up that extra 0.3% on an annualized basis of added value and provide themselves some of that flexibility and being efficient with their money. Because at the end of the day –
Walter Storholt:
That complexity can provide opportunity, though. That’s what you’re getting at.
Tyler Emrick:
100%, right?
Walter Storholt:
Yeah.
Tyler Emrick:
Absolutely. And that compounding of not having to pay the tax bill, that’s more money invested over the long run that has these bigger ramifications when we start thinking about and projecting out a long, happy, healthy retirement. And hey, if we’ve got a listener here that’s on the doorstep of retirement, you want to be looking at, “Well, do I have a multitude of these accounts?” Because you should. Because in retirement, when you think about where your money’s coming from, going back to flexibility, Walt, and how we think about building out where your money’s going to come from in retirement, having these different pots and these different buckets provides that flexibility. And when you need it and when it shows up, it’s tremendous to lean on and have. So that’s a big benefit here as we start thinking about, well, why do we want the complexity? Why do we want all these other accounts?
Well, we want the flexibility of having control over how much good old Uncle Sam gets in taxes from us, right? Which is why we look at this all the time, right? Every year. I mean, honestly, when we are managing investments for families and households that have multiple accounts, our trading team is looking at that every day. When they do their buy and sell decisions of the investments that are underlying in there, one of the big overarching themes that they are looking at for every single family we work with is how do these trades and how do these investments impact the tax situation, and how can we get the proper investments in the proper accounts without going against the high level risk and constraints that we have for the families?
Because, obviously, we don’t want to do asset location at the expense of holding much more in stocks, or being much more conservative, or whatever. This has got to fit within the broader framework of what the household, the individual, the family’s trying to accomplish from an investment standpoint. But the added value here is certainly something we feel like a lot of advisors just miss out on because they look at each individual accounts or they’re not looking at the household level, which we feel like adds a ton of value when you think about it from an investment performance standpoint, after tax, and even a distribution standpoint in retirement.
Walter Storholt:
Yeah. Make sure that asset location is part of your planning process. If you’re working with an advisor who’s not talking about this, that might be a sign that maybe you’re not squeezing as much as you could out of your overall strategy and plan. And if you’ve not reviewed your asset location personally over several years or major life events and those kinds of things, this is the time to make sure you’re doing all those things. Anytime something big in life, I guess, kind of changes. But you guys sound like you kind of pretty much do it, probably, at every visit. [Inaudible 00:16:19]
Tyler Emrick:
Every visit. Because our families, we have the ability to buy and sell the investments within our agreement and within our expectations set with those families. But one of the reasons why we work under a structure like that is so that we can do this on a day in and day out basis.
That doesn’t mean we’re trading the accounts every single day. But when we have these months of high volatility, like last year when the tariffs were introduced and that month was very volatile and came down, that’s when these rebalancing decisions, and harvesting losses, or rebalancing each account at the household level really starts to add value and shine when we experience these times of high market volatility or uncertainty. But we’re definitely looking at it all the time.
Walter Storholt:
Very good. Well, hey, if you have questions about asset location, you want to talk to an advisor on the team, you can certainly do that. Truewealthdesign.com is the place to go and click the let’s talk button, or click the link that we have in the description of today’s show. That’ll take you to the same place, where you can schedule a 20-minute discovery call to discuss this issue as well as others that might be on your mind. And overall, just see if you’re a good fit to work with the team and move forward. And it’s a great way to just test the waters and see if you’re a good fit.
So I encourage anybody that’s thinking about asset location and wanting to plan better, retire smarter, like the name of the show, and all those kinds of things, don’t hesitate to reach out. Again, links in the description of today’s show, or go to truewealthdesign.com.
Tyler, thanks for all the help today. Great conversation and topic. You’ve made me a believer out of that 0.3% number and the difference it can make.
Tyler Emrick:
Tax investments. Tax investments. Yeah.
Walter Storholt:
I love it. Love it. We’ll see everybody next time right back here on Retire Smarter.
Speaker 3:
Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
