Published October 28, 2016
After market-risk and inflation-risk, which investors take great strides to mitigate through sound investment practices, taxation-risk presents the biggest obstacle to building wealth. A sound investment strategy not only seeks to generate returns on your capital, it also seeks to preserve as much of your capital as possible to keep it working for you. One of the surest ways to preserve your capital is to reduce the amount of taxes you pay on investment income and gains. By incorporating tax-saving strategies into your investment plan, you can minimize the impact that taxes have on your capital-at-work.
With your asset allocation it’s all about location
One of the first rules of wealth accumulation is to sock away as much of your income as possible into a tax-qualified retirement plan, such as a 401k, 403b, or an IRA. This gives you an immediate and long-term tax advantage. However, in terms of an overall asset allocation strategy, the placement of various types of investments among your tax-qualified plans and your non-qualified investment accounts is nearly as important as the selection of investments for meeting your particular investment objectives. At its simplest, you should place your tax efficient investment in your non-qualified investment accounts, and your non-tax efficient investments in your qualified accounts.