Account Types & Asset Location

Choosing different types of investments is hard enough. Complicating matters further, now you have to decide which types of accounts to invest in.

With so many rules involving each of the account types, let’s review the basics of the different options.

Tax Deferred Accounts

Retirement plans, like IRAs and 401(k)’s, are great investment vehicles that allow you to save money for retirement while deferring taxes in high-income earning years. But Uncle Sam isn’t going to let you defer those tax dollars forever.

Required Minimum Distributions (RMDs) are minimum annual withdrawals that you are required to take from retirement accounts once you reach a certain age (RMD beginning ages in table below). These distributions can cause taxes during retirement to be higher than desired.

Taxable Accounts

A taxable brokerage account (Individual or Joint) is one where you contribute after tax dollars and are only taxed on income produced within the account (interest & dividends) and capital gains upon realization.

A benefit of a taxable account is that it provides for great flexibility, and most of the time should be the first account used to produce income during retirement.

Tax Exempt Accounts

Roth IRAs and Roth 401(k)’s are investment accounts where the investor contributes after-tax dollars, the money grows tax-free, and is tax-free upon withdrawal.

There is even a strategy called a Roth Conversion where money from an IRA is converted to a Roth IRA, which can help to decrease taxes due during retirement & leave more tax-free money to your inheritors. You can read more about these accounts and this strategy here.

Asset Location

So how can we use financial planning to determine which account types to utilize? One answer is Asset Location.

Asset location involves the strategic utilization of different types of investment accounts in order to minimize taxes.

There is a lot that should be considered when determining which account type an investor should invest in (age, income, goals, etc.), so it’s imperative that you discuss this with your advisor to develop a game plan.

Concerns or questions about your financial plan? Contact Financial Synergies today.

We are a boutique, financial advisory and total wealth management firm with over 35 years helping clients navigate markets and developing custom financial plans. To learn more about our approach to financial planning please reach out to us. One of our seasoned advisors would be happy to help you build a custom financial plan to help ensure you accomplish your financial goals and objectives. Schedule a conversation with us today.

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