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Asset Allocation vs. Asset Location

Most people are aware of the term asset allocation. However, asset location is not as widely known and can be a tremendous benefit to someone that has a larger net worth with different types of accounts and/or tax consequences. Here, we discuss the difference between asset allocation and asset location.

What is Asset Allocation?

Asset allocation is a strategy that balances risk and reward by allocating a portfolio into asset classes after assessing an individual’s risk tolerance, time horizon, and goals.

What is Asset Location?

Individual retirement accounts (IRA’s), Roth IRA’s, and taxable brokerage accounts are all different types of accounts that people invest in.  They also have very different tax consequences.

IRA’s grow tax-deferred and then are taxed as ordinary income when a distribution takes place.  Roth IRA’s grow tax free and can also have tax-free distributions.  Taxable accounts can take advantage of the preferred capital gain and dividend tax rates.  Asset location is designed to take advantage of those different tax consequences.

Which Investment Strategy is Better?

For example, let’s say someone wants to have a portfolio with a total asset allocation that is 60% equity and 40% bonds. Most people will invest the IRA, Roth IRA, and brokerage account with the same 60% equity and 40% bond allocation.

However, this is not tax efficient. Individuals need to spend more time placing the right type of investment in the correct location to not only create the right asset allocation, but also to create tax efficiency.

Have you spent time reviewing both asset allocation and asset location?  If you would like to know more about this topic, please contact us so we can go into more detail with your individual circumstances.

About Chatterton & Associates

At Chatterton & Associates, we are more than just one-and-done financial advisors. We are proactive planners that work alongside our clients to uncover their needs and goals, and then design a fully personalized and comprehensive financial plan to achieve them.

 Learn more about proactive planning - request a complimentary financial review today!

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