Understanding Asset Location (VIDEO)
Some of your investment accounts and assets are more tax-friendly than others. For example, interest earned from bonds is taxed as ordinary income while gains from stocks are taxed at a lower capital gains rate. An investor may use a tax strategy known as asset location in an attempt to manage different tax rules and reduce the overall tax burden in his or her portfolio.
Basically, asset location means placing lower-taxed assets in taxable accounts and higher-taxed assets in tax-advantage retirement accounts. Investment Specialist Jennifer Flaherty demonstrates how it all works in this brief video. She also discusses the potential shortfalls of asset location and explains why this tax strategy shouldn’t overshadow a more important investment strategy – your asset allocation.