With Tax Strategy, It’s Asset Location, Not Allocation That Counts – InsuranceNewsNet

InsuranceNewsNet — Your Industry. One Source.™

Sign in
  • Subscribe
  • About
  • Advertise
  • Contact
Home Now reading Top Stories
Topics
    • Life Insurance
    • Annuity News
    • Health/Employee Benefits
    • Property and Casualty
    • Advisor News
    • Washington Wire
    • Regulation News
    • Sponsored Content
    • Webinars
    • Monthly Focus
  • INN Exclusives
  • NewsWires
  • Magazine
  • Free Newsletters
Sign in or register to be an INNsider.
  • INN Exclusives
  • NewsWires
  • Magazine
  • Free Newsletters
  • Insider
  • About
  • Advertise
  • Editorial Staff
  • Contact
  • Newsletters

Get Social

  • Facebook
  • Twitter
  • LinkedIn
Advisor News
Top Stories RSS Get our newsletter
Order Prints
December 13, 2017 Top Stories No comments
Share
Share
Tweet
Email

With Tax Strategy, It’s Asset Location, Not Allocation That Counts

By Brian O'Connell

With new tax policy getting a green light from Congress, investment professionals are already scrambling to gauge the impact on client investment portfolios.

One move that financial specialists are already making is to hit the tax sweet spot between what one financial advisor calls asset allocation and asset location.

“It’s the often-overlooked strategy of placing investments in the right accounts to minimize taxes,” said Thomas Walsh, a money manager with Palisades Hudson Financial Group, in Atlanta.
The difference between asset allocation and asset location is all about stashing tax-efficient investments in taxable accounts and steering tax inefficient investments in tax-free or tax-deferred accounts, and doing so in a portfolio unified manner, Walsh said. “By considering all of your accounts together,” he said, “you can make good decisions about which accounts will hold which types of assets.”

Analyzing the tax implications of asset allocation shouldn’t be the byproduct of new legislation from Washington, D.C., even though that’s the case in late 2017, said Michael Shea, a financial advisor at Applied Capital in Nashville.

“Regardless of what is going on with tax reform, when analyzing your portfolio, tax considerations should always be taken into account,” Shea said. “The more money you earn, the more important it is to be aware of the tax implications of your investments and what accounts they’re held in.”

For example, if you have client retirement accounts such as 401(k)s and IRAs in conjunction with after-tax brokerage accounts, you should pay attention to what positions are in each account. “If you have a high-income-producing asset like real estate or fixed income you’re usually better off having this in a qualified account,” Shea said. “This way you don’t have to pay taxes on the income.”

Money managers also need to pay attention capital gains distributions in their mutual funds. “These distributions can occur when securities inside a mutual fund have been sold to raise cash,” Shea said. “This could happen due to investors selling their positions. In 2008 and 2009 this was an issue for some people because investors were fearful and wanted to get out of the market. This triggered out flows from mutual funds. As a result, those who stayed invested got hit with a larger tax bill due to capital gains distributions that were passed on to shareholders.”

Stock and Fund Tax Location Strategies

Where to put the appropriate investments, tax-wise? Investment experts say the answer isn’t a complicated one.

“The key to asset location is to place the most tax efficient assets into taxable investment accounts and the most tax inefficient assets into the tax-deferred/Roth accounts, said Ben Westerman, senior vice president at HM Capital Management, in St. Louis, Mo.
“Index funds (in particular the S&P 500 Index) are the most tax efficient investment vehicles,” Westerman said. “These investments should be held in taxable accounts. Less tax efficient equity investments, such as actively traded funds, should usually be held in tax-deferred/Roth accounts.”

“Meanwhile, bond investments, due to the potential for ordinary income from interest payments and any investments in commodities, should be held in tax-deferred accounts,” Westerman added.

There are some more specific tips on where to put stocks and funds, to gain those big tax advantages, according to Westerman.

For stocks - Investment advisors should aim to put client stocks in your taxable accounts because the income on stocks (i.e. dividends) are generally taxed at preferential tax rates, said Derek Hagen, director of wealth management at Flourish Wealth Management, in Edina, Minn. “Further, you have some control over the capital gains, because you'll only pay those if you sell your investments at a gain. Long term capital gains are taxed at preferential rates, as well. Short term capital gains, though, are taxed at ordinary income tax rates.”

For funds - If money managers are investing client cash in funds, the goal is to look for funds with low turnover ratios for your taxable accounts, Hagen said. “This ratio indicates how much the fund company trades,” he explained. “The more they trade, the more likely it is that you will get capital gains distributions, even short term capital gains distributions.”

Additionally, a money manager’s best bet is to look for funds that are tax-managed, said Hagen.

“Broad funds are usually better than specific funds,” he said. “If a small company does well, for example, a small cap manager will have to sell it from her fund since it is no longer a small company. This could result in capital gains distributions. That same company in a broad market fund won't have to get sold.”

No “One Size Fits All”

By and large, asset allocation is no “one size fits all” process. Factors like current and future tax estimates, investment account types and sizes, and even estate planning issues factor into the equation.

“It’s as much an art as it is a science, and sometimes you have to make compromises with what’s ideal versus what’s practical,” Walsh said. “While asset location may not save you a large amount of taxes in any one year, it should produce small increases in your after-tax return every year. Over decades, these small amounts compound and can really add up. There’s no need to pay more federal and state income taxes than you have to.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected]

© Entire contents copyright 2017 by AdvisorNews. All rights reserved. No part of this article may be reprinted without the expressed written consent from AdvisorNews.

Older

A Walk Through the Insurance Technology Landscape

Newer

Dental Savings Plan Enrollment Rises 20 Percent

Advisor News

  • Banks announce dividend plansTruist, Wells Fargo, Bank of America announce dividend hike plans
  • Jerry Shenk: Social Security demagoguery
  • Rick Kahler: My state flunked financial literacy. How about yours?
  • Inflation affects each family differently
  • With retirement balances down, a Roth conversion may make sense
More Advisor News

Annuity News

  • Sammons names Kevin Mechtley to newly created product innovation role
  • Athene completes pension group annuity deal with Lockheed Martin
  • Integrity expands annuity, life insurance distribution with Annuity Agents Alliance
  • Nationwide increases roll-up rate, payout percentage on L.inc+ suite
  • Midland Retirement Distributors launches Summit Focus 3
More Annuity News

Health/Employee Benefits News

  • How will Roe v. Wade reversal impact employee health plans?
  • Jury still out on new insurance plan for Idaho schools
  • Citadel reaches $7.85M settlement over switching patients to boost Medicare payments
  • Idaho gave schools millions to buy state health insurance, but many still can’t
  • Colorado one step closer to a state-designed health insurance plan
More Health/Employee Benefits News

Life Insurance

  • Wisconsin seeks policyholders of insolvent Time Insurance Co. products
  • 4 things to know about the return of premium life insurance
  • Murdaugh, Curtis Smith hit with new SC grand jury indictments
  • Foresters Financial boosts UL crediting rate to 4.75%
  • Protective Life releases 2021 sustainability report
More Life Insurance

- Presented By -

Product Alerts by INN
Brought to you by TSR

Protect Your Clients

Discover how you can find out which life insurance and annuity carriers actually have the financial strength to back their promises to your clients long into the future.

Financial engineering and reinsurance “sleight-of-hand” are prevalent in the insurance industry today. And this risky behavior could be reducing the reserves held to protect your clients.

The TSR Ratio exposes these troubling levels of risk on some stock and private equity owned insurers’ balance sheets. And right now, you can get access to an exclusive report…

Continue reading

How to Write For InsuranceNewsNet

Find out how you can submit content for publishing on our website.
View Guidelines

FEATURED OFFERS

It’s time for John Hancock Insurance See how our cutting-edge solutions can help you grow your life insurance business. Get to know us.

Press ReleasesAll press releases

  • iPipeline® Provides Advisors Excel with Unified Path Toward Accessing Core Data Analytics in Financial Services
  • iPipeline® Adds Speed of Underwriting to Quote Engine with Ethos to Deliver Insurance to Agents in Minutes
  • National Life Will Host Annual Investor Call
  • RFP #T01622
  • OneAmerica Commits $1 Million Toward Financial Literacy
Add your Press Release >

Topics

  • Life Insurance
  • Annuity News
  • Health/Employee Benefits
  • Property and Casualty
  • Advisor News
  • Washington Wire
  • Regulation News
  • Sponsored Content
  • Webinars
  • Monthly Focus

Top Sections

  • Life Insurance
  • Annuity News
  • Health/Employee Benefits News
  • Property and Casualty News
  • AdvisorNews
  • Washington Wire
  • Insurance Webinars

Our Company

  • About
  • Editorial Staff
  • Magazine
  • Write for INN
  • Advertise
  • Contact

Sign up for our FREE e-Newsletter!

Get breaking news, exclusive stories, and money- making insights straight into your inbox.

select Newsletter Options
Facebook Linkedin Twitter
© 2022 InsuranceNewsNet.com, Inc. All rights reserved.
  • Terms & Conditions
  • Privacy Policy
  • AdvisorNews

Sign in with your INNsider Account

Not registered? Become an INNsider.