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An In-Depth Look at the Tax Consequences of Asset Location

by Kevin Trout

An In Depth Look At The Tax Consequences Of Asset Location Splash image

Asset location refers to where an investment asset is held: in a tax-deferred retirement account (e.g., an IRA) or in a taxable account. By fine-tuning asset location, investors can improve their aftertax return on their overall investment portfolio.

Articles on asset location cannot definitively rank the type of investments to place in a tax-deferred account because such a ranking depends on changeable factors: return parameters that are constantly in flux in the economy; tax rates, which change with the political environment and investors’ income level; and investment holding periods, which are specific to the investor. This article summarizes the general information on asset location and gives investors access to a model that can help refine asset location decisions to take

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Kevin Trout is an adjunct instructor and lecturer at Coe College and the University of Iowa, respectively, where he teaches Personal Financial Planning and Taxes and Business Strategy, among other courses.


Discussion

Gerald Lanois from Florida posted about 1 year ago:

This article is not very useful, as the Author unfortunately overlooks important details, as to the advantages/perils of other various investment types, being held in taxable, or tax defered accts, notwithstanding dividend/growth earnings!
IE MLPS, various Prefereds, C corps, royalty trusts, CEFS, options,CDS, etc


Bob Edds from Ohio posted about 1 year ago:

Useful up to a point but much remains unsaid. Needs to include Roth IRAs. This topic begs for a great graphic that communicates what many paragraphs of text are trying to do.


Carl Birx from New York posted about 1 year ago:

These comparisons always make the same error in that they compare equal investment amounts. If I earn $10,000 and place it in my 401k I place all $10k in. If I earn $10k and invest it after taxes I haven't invested $10k, more like $7k after taxes. You have to take into account the taxes paid before the investment is made as well as the taxes afterwards.


Dan from Connecticut posted about 1 year ago:

It would be helpful if the spreadsheet weren't protected. Not only is it protected by it also requires a password in order to remove the protection. How are you supposed to modify the tax rates to conform to your own situation?


John Scully from California posted about 1 year ago:

ditto on the comments by Gerald Lanois.


Robert Trout from Iowa posted about 1 year ago:

Dan - the spreadsheet is protected so users don't inadvertantly override the formulas. But as shown in the tab "How to use the model" the cells filled with a yellow background can still be changed. So you can enter your own tax rates in the yellow cells marked "tax rate input".

Hope that helps.

Kevin Trout


Robert Trout from Iowa posted about 1 year ago:

Carl - If you notice in the spreadsheet the formula for the after tax rate of return includes a gross up for the tax deduction on the Traditional IRA/401k. So the model does indeed does take into consideration the deduction or exclusion of those investments vehicles.

Kevin Trout


David Bertholf from Florida posted about 1 year ago:

There are so many potential variables that it would be very difficult to address them all in an article of this length. I thought it did a good job as a general look. My one recommendation would be to change the title to A General Look at... vice An In-Depth Look at...


Toan Nguyen from California posted about 1 year ago:

Like many retirees, I no longer work and will not have real wages in 2013. Will you please let me know the tax rates for withdrawals from IRA and dividends from stocks, assuming that my IRA withdrawal will be less than $150,000 and my dividends will total less than $80,000 for 2013. Thanks.


Charles Rotblut from Illinois posted about 1 year ago:

Hi Toan,

The 2013 tax rates can be found here:
http://www.aaii.com/journal/article/2012-tax-guide-update

You will pay ordinary income tax rates on your withdrawals and the reduced dividend tax rate on qualified dividends.

-Charles
AAII


M. A. from Minnesota posted about 1 year ago:

Bob,

A graphic can be found in this article: www.kitces.com/blog/archives/479-Asset-Location-The-New-Wealth-Management-Value-Add-For-Optimal-Portfolio-Design.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+KitcesNerdsEyeView+%28kitces.com+%7C+Nerd%27s+Eye+View%29&utm_content=Yahoo%21+Mail

Maud


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