Asset location is a term that is used to identify how investors choose to allocate different investments across a range of different types of accounts. The idea is to determine how the available funds are segregated among taxable accounts and non-taxable accounts. Investors can utilize the concept of asset location to their advantage by allocating assets to different types of accounts, creating a balance in the portfolio that helps to minimize the tax debt while also allowing the investor to grow the value of his or her portfolio.
Employing the process of asset location typically involves assessing current holdings and finding ways to place investments that generate some sort of income in accounts that allow for deferring taxes or minimizing the tax obligation associated with that asset. For example, bonds are often placed into non-taxable accounts, allowing the investor to receive the most benefit overall from the bond issue. At the same time, equity investment such as index funds would most likely be placed into taxable accounts, based on the requirements found in current tax laws and regulations.
When the assets held by a given investor are distributed to best advantage, the process of asset location makes it possible to maximize the amount of return that remains in the hands of the investor. This in turn allows the investor to redirect some of those returns directly into the economy, either in the form of the direct purchase of goods and services or by acquiring additional investments that enhance the ability of businesses to continue operating at optimal levels that require the retention and possible expansion of their work forces. From this perspective, asset location is not only about protecting the interests of individual investors, but is also about maintaining a balanced economy that ultimately benefits the majority of people living in that nation, even those who are not directly involved with those assets.
Observing current tax laws is key to making proper assessments and locating assets in a manner that is considered legal. Failing to do so can lead to audits that in turn generate significant amounts in terms of fines and penalties. If the illegal placement of assets is found to be deliberate rather than unintentional, additional actions may be taken, up to and including imprisonment. For this reason, it is important to make use of financial professionals who are well-versed in current tax laws in order to use asset location properly and within the limits of current tax laws.
