Different types of investments are treated differently by the IRS – Proper Asset Location of Stocks, Bonds, Real Estate and Hard Assets, which is why proper asset location is an important strategy to implement in order to minimize the tax that you will owe as an investor.
The money manager that you work with will develop an asset location and investment strategy to determine where your money should be invested in order to pay the least amount of tax while reaping the best returns. Investors who will garner the most benefit from an asset location strategy, according to most money managers, are those who have investments in both tax deferred and taxable accounts, with their assets divided between the two.
In this manner, a balanced strategy can be determined and implemented that typically features a portfolio of a particular percentage of stocks and bonds, or some other mix of hard assets and real estate in the most cost-effective means when it comes to settling up with Uncle Sam each year. The amount of money from your portfolio that is dedicated towards a particular asset is determined by how the asset is taxed under this strategy. A money manager will use the United States tax code to make decisions about where you should invest. For example, dividends and capital gains are taxed at only 15%, while interest income is taxed at 35%.
This makes stocks and equity mutual funds a better bet for your investment dollars. With a fixed income investment like a real estate investment trust or bond can provide a good cash flow for you as an investor, but are taxed at 35%. Mutual funds that create yearly high annual capital gains also belong in a tax deferred account for the best results of your investments.
A money manager can set up a sheltered tax deferred account for this type of income, which makes working with a trusted person in this regard important to maximizing your investments and avoiding tax when possible. As you can see, asset location is an important part of managing your money that is best left to a money manager who has proven results for other investors. Each investor’s situation is different, which is why there is no simple formula for asset location that can be referenced – only suggestions.
Allocating investment money to a particular asset is best achieved when the investor’s overall financial picture, current tax code and laws, holding period for investments and the characteristics of the asset are all assessed by a seasoned, knowledgeable professional.