What is it?
Asset location is not only about thoughtfully placing your retirement savings in the right type of accounts, but also where and when you withdrawal from these accounts in retirement. Examples may include “tax-deferred” (i.e. 401k, IRA, etc..), “tax-exempt” (Roth IRA) or “taxable” (i.e. savings, brokerage, etc…). Similarly, some investments are more tax-efficient (tax-free municipal bonds) than others.
Why does it matter?
You can minimize your tax liability each year in retirement if you know which holding and which account you should liquidate for income. A smart strategy considers not only the security, but also the types of accounts you have. In addition, retirees may consider putting their most tax -efficient investments in the taxable accounts and the least tax-efficient in a tax deferred account.
How do people get it wrong?
Some may have a large percent of tax-inefficient investments in their taxable accounts. Others may overlook the benefits of using a Roth IRA and miss an opportunity to have another critical income source in retirement. Retirees should also consider the location of assets based on the household, not just the account level.