I attended the CFA Society of Houston’s Rice Wealth Management Symposium entitled “Putting Investors First” this month, where I heard Sharon Carson of J.P. Morgan discuss her Guide to Retirement. Investors often struggle with understanding which aspects of their retirement and investment planning they can actually control. Sharon shared this graphic, which clearly depicts the four areas of planning where you have some measure of control—and the two where you have none.

For the final post in our tax management series, we’ll take a look at asset location. Everybody knows the three rules of real estate, but most don’t know that the same rule also applies to investment portfolio construction.

Asset location is the practice of positioning tax-inefficient assets in tax-advantaged accounts. For example, fixed income and REITs should first be held in tax-deferred accounts like an IRA, 401(k), or 403(b) while tax-free municipal bonds and equities should be positioned in taxable accounts.

A recent study by Vanguard estimated that professional advisors can add up to .75% annually to investment returns by utilizing proper asset location in client accounts. It is all too frequent that we find new clients coming on board with poor use of asset location, but with a few simple tweaks we can align your investments to maximize your after-tax return.

Continuing on in the tax management series, this month we’ll look at account sequencing during wealth accumulation and retirement withdrawal periods. The basic questions are:

1) When accumulating funds, what accounts (tax-deferred, taxable, etc.) should be funded first?

2) When withdrawing funds, in what order should funds be withdrawn?

Individual circumstances may constitute different strategies, but the following examples demonstrate two common approaches. The first is based on someone in the accumulation phase who pays taxes in the highest bracket, and the second is a retiree in the withdrawal phase who will leave behind some amount of inheritance:

Following logical strategies for adding and withdrawing funds ensures that you accumulate and retain the maximum after-tax amount possible.

Next month, we’ll look at matching investments with the most appropriate account types.