How Investment Structure May Help Optimize Long-Term After-Tax Wealth
For high-income professionals and business owners, tax efficiency is an essential part of wealth management. While market performance and asset allocation are widely discussed, many investors overlook the impact of asset location—how different investments are placed in different types of accounts to help manage taxes and long-term financial outcomes.
Asset location is a tax-aware investment strategy that may allow investors to:
- Minimize unnecessary tax liabilities on investments
- Improve after-tax returns over time
- Enhance portfolio efficiency and retirement income strategies
While no strategy can eliminate taxes entirely, structuring investments in a tax-conscious way may help investors preserve more of their wealth over the long term.
What Is Asset Location?
Asset location is often confused with asset allocation, but they serve different purposes:
- Asset allocation refers to how a portfolio is distributed among different asset classes (e.g., stocks, bonds, real estate) to align with investment goals and risk tolerance.
- Asset location focuses on where those investments are placed—such as taxable, tax-deferred, or tax-free accounts—based on tax implications.
A well-structured asset location strategy may allow investments to grow more efficiently by minimizing tax drag and optimizing after-tax wealth accumulation.
How Asset Location Affects Tax Efficiency
Each type of investment account is subject to different tax rules, and understanding these differences is key to making informed decisions about investment placement.
Example: Applying Asset Location to a High-Net-Worth Portfolio
Consider an investor with the following assets:
- $2M taxable brokerage account
- $1M traditional IRA
- $500K Roth IRA
A tax-efficient asset location approach might include:
- Placing high-growth stocks in the Roth IRA, where potential growth can compound tax-free.
- Allocating dividend-paying stocks and taxable bonds to the traditional IRA, where income is sheltered from immediate taxation.
- Holding tax-efficient ETFs and municipal bonds in the taxable brokerage account, reducing the impact of capital gains taxes.
While individual results vary, structuring investments with tax efficiency in mind may help preserve more wealth over the long term.
Common Mistakes in Asset Location
Even experienced investors may inadvertently increase their tax burden by overlooking asset location considerations. Here are a few common mistakes:
Holding tax-inefficient investments in taxable accounts
Example: Keeping high-dividend stocks or actively managed mutual funds in a brokerage account may lead to unnecessary taxable events each year.
Overlooking Roth accounts for tax-free growth potential
While Roth contributions may be income-limited, Roth conversions can provide tax-free growth opportunities in some financial plans.
Not considering tax-efficient withdrawal strategies
Unstructured withdrawals in retirement may result in higher-than-necessary tax liabilities, impacting cash flow and long-term wealth preservation.
Potential Risks and Considerations
While asset location strategies may provide tax benefits, they should be considered within the context of an investor’s broader financial picture. Key considerations include:
- Changing tax laws: Tax rates and regulations evolve, which may impact the effectiveness of specific strategies.
- Liquidity needs: Some accounts have withdrawal restrictions or penalties for early access.
- Required minimum distributions (RMDs): Tax-deferred accounts require minimum distributions beginning at age 73, which can affect future tax obligations.
- Future income levels: Deferring taxes now could lead to higher taxes later, depending on legislative changes and income levels in retirement.
Investors should work with a qualified financial professional or tax advisor to determine the most appropriate approach for their unique financial situation.
Integrating Asset Location Into a Comprehensive Wealth Strategy
At ALNA Wealth, we take a holistic approach to financial planning, incorporating tax-efficient investment strategies like asset location alongside:
- Comprehensive investment management
- Retirement income planning
- Tax-aware financial planning
- Estate and wealth transfer considerations
Next Steps: Optimize Your Asset Location Strategy
Because tax implications vary based on individual circumstances, no single asset location strategy is right for everyone. A personalized approach—tailored to your specific financial goals, risk tolerance, and tax considerations—can help ensure your portfolio is structured as efficiently as possible.
If you're interested in learning more about tax-efficient investing strategies, schedule a consultation with ALNA Wealth to explore customized strategies that align with your long-term financial objectives.
This article is provided for informational and educational purposes only and is meant to be general in nature. The investment strategies discussed herein do not ensure a profit or protect against loss in a declining market. There is no assurance that any strategy will be successful. Investing involves risk and the potential to lose principal and nothing herein should be interpreted as an indication of future performance.
The information contained herein is not intended to be personal investment advice or a solicitation or recommendation to engage in any particular investment strategy. Although we strive to provide accurate and timely information, please understand that the material is provided “as is” without any express or implied warranties. No one should act upon any information contained herein without appropriate professional guidance from a professional.
A key difference between the Roth 401(k) and Roth IRA is their withdrawal rules. You can only withdraw from your Roth 401(k) once you’ve reached age 59 ½ and it’s been at least five years since your first deposit. This rule applies to both your contributions and any earnings. Any withdrawals that don’t meet these requirements will result in tax penalties. In a Roth IRA, the withdrawal rules for your earnings are the same as the rules for a Roth 401(k). However, you can withdraw your contributions tax-free and penalty-free at any time. For both account types, there are also exceptions when the IRS allows you to withdraw from your account with no tax penalty. Those exceptions include the birth or adoption of a child, a permanent disability, a personal or family emergency, and more.
