Asset Allocation For Dummies®

Chapter 10. Knowing Where to Put Your Assets: Asset Location

In This Chapter

• Thinking about your accounts in a holistic way

• Understanding the tax characteristics of your investments

• Trying out an asset location exercise

Wouldn't it be a shame if you did all the right things to get your assets properly allocated, and bought all the right securities, only to see your hard-earned gains go to the tax man? Wouldn't it be even worse if it happened unnecessarily? That's what can happen (and does happen to most investors) if you don't consider another step — asset location.

Asset allocation is all about decreasing risk and increasing return. Asset location is all about saving taxes.

Put simply, asset location is putting tax-inefficient (highly taxable) investments in tax-deferred accounts, and putting tax-efficient investments in taxable accounts. If asset allocation (Chapter 8) is picking the right (and right-size) baskets, and security selection (Chapter 9) is picking the right eggs to put in those baskets, then asset location is deciding on the right shelves on which to store those baskets.

That's what we cover in this chapter. First, we take a look at all the different types of accounts you may have, and what their tax characteristics are. Then we examine the tax efficiency of your different asset classes and investments. Finally, we give you hands-on information about how best to stock those shelves. We follow the progress of John and Jane Doe, a fictional couple whom we introduce in Chapter ...