Q: I have a question about asset location. I currently have 85% in equity and 15% in bond allocation. I understand that bonds are not tax-efficient and that it’s best to keep them in tax-advantaged accounts. I have a much larger percentage of my portfolio that is taxable, so that means that my tax-deferred accounts are almost entirely in bonds. That means that my tax-deferred accounts will most likely grow at a much lower rate than my taxable which is all equities. This doesn’t sit well with me. Is this the proper approach?
A: We build income-focused portfolios for our clients with a buy and hold, long term time horizon in mind. With this in mind, we allocate fixed income to Qualified Accounts (IRA and 401k) because this shields the client from paying ordinary income taxes on the income being generated on a monthly or quarterly basis. They only pay the ordinary taxes when taking withdrawals from the account, as needed, not when the income is actually received. We allocate our stocks and ETF’s in Taxable brokerage accounts because we are buying stocks and ETFs to be held for a very long time, which may reduce the overall tax liability because the capital gains tax will only be realized when a stock or ETF is sold. We recommend you sit down with a financial advisor to talk about this in more detail for specific recommendations catered to you.
