Asset Location
Dr. Henry, a successful plastic surgeon in Newport Beach, California, came to me seeking help with his financial planning and his portfolio. Like many investors, he had an IRA account, sheltered from taxation, and a taxable brokerage account too. It’s a common setup. And, like many other clients I’ve worked with, this plastic surgeon had his assets in all the wrong places.
Sitting in his taxable account was a high-yield bond fund that was yielding about 5.5 percent. As a plastic surgeon in California, his income taxes were substantial. And bond interest is taxed as ordinary income—so he was losing half of his gain right off the top.
I presented him with a proposal for fixing that, along with other changes in his portfolio. “There’s this principle that we utilize called asset location,” I explained, “and this means that we need to put investments that generate a lot of tax inside of your IRA and investments that don’t generate much tax inside your brokerage accounts.”
My advice: sell the bond fund in your taxable account, then buy it back in your IRA. Overnight that saved him about $4,000 a year in taxes.
“Oh,” he said, “I guess I didn’t think about that.”
The investment the doctor had chosen was outstanding. But where he put it was wrong. The lesson in his example is straightforward: Where you put your assets can save you a significant amount of money in taxes.
Vanguard found that asset location can save investors up to 0.75% of their portfolio value per year, or $7,500 on a $1 million portfolio.
I’m not advocating tax evasion here. I believe everyone should pay their fair share of taxes. What I am advocating is tax avoidance—not paying more taxes than you have to—and that’s both perfectly legal and entirely sensible.
Want to learn more about how to disinherit the IRS and lower your tax bill?
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Jonathan Bird, CFP®
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