What is Active Asset Location Strategy - Part B

In last blogpost, we discussed what is active asset location strategy.  Now we will discuss if you can benefit from it.

There are 4 main criteria that tend to indicate whether an asset location strategy may be a smart move for you. The more of these criteria that apply to your situation, the greater the potential advantage in seeking enhanced after-tax returns.

1. You currently pay a high marginal income tax rate: The higher the marginal income tax rate you currently pay, the bigger the potential benefits of asset location. Remember, as you earn more money, you may move into a higher marginal tax bracket. Consequently, the benefit of your additional income can be significantly reduced if you are being taxed at a higher marginal tax rate.
2. You expect to pay a lower marginal income tax rate in the future: If you expect your marginal income tax rate to be lower in the future than it is now, active asset location may allow you not only to defer your taxes but to reduce them as well. Note that it is very common for investors to see their marginal income tax rate fall following retirement, and if you have assets with a time horizon into retirement, this may well be the case for you.
3. You have significant assets in tax-inefficient investments held in taxable accounts: The more tax-inefficient investments, such as taxable bonds and taxable bond funds, you're currently holding in taxable accounts (see chart, below), the greater the potential to take advantage of asset location.
4. You are investing for the long term: Asset location strategies generally take time to work. While small tax benefits may be realized year over year, sizable benefits may be realized by allowing potential tax savings to compound. If relocating assets in a taxable account, you may incur initial tax costs when implementing an asset location strategy and it may take time for the benefits to outweigh the costs.

If you are in a position to benefit from an asset location strategy, you have to choose which assets to assign to your tax-advantaged accounts and which to leave in your taxable accounts, see next blogpost here.