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How Asset Location Can Minimize Taxes

August 4, 2021 Steve Zuschin By Steve Zuschin

Nobody likes to pay more taxes than is required of them. In fact, it is becoming customary for clients to want advisors to do what they can to help reduce as much of the tax burden as possible on their investment accounts. It only makes sense that you would want to help them find a way to execute this, right?

The first step to optimizing taxes for the investment clients of your firm is to see what their unified managed household looks like. So what is a unified managed household?

It’s LifeYield’s mission to enable one. It’s essentially taking a client’s asset allocation to the household level and coordinating assets across accounts to achieve the best possible outcomes for the client. Tax is a major piece of this. So it is Social Security.

LifeYield doesn’t just look at each account individually. It looks at all the accounts on a household level at one time.

A client’s unified managed household can tell you a lot about their investment health. LifeYield looks across this household and provides your firm with the tools to give your investment client an Asset Location Score. The score shows how tax efficient the investment client’s portfolio is before and after optimization.

Let’s say that your client comes to you with multiple accounts. LifeYield’s Asset Location Score returns a number of 45. Keep in mind that the scale is 1 to 100, and the average score is a 53. After using LifeYield’s library of products, the Taxficient score jumps to 75. Not only is this an increase of 30 on the scale, but it can also be quantified into a dollar amount for the future. What if your client’s retirement accounts could increase by $500,000 in the future just by locating assets in the right tax-efficient accounts?

What Asset Location Can Do

Asset location is not just about how you can shelter your client’s accounts from taxes. There have to be trade-offs made to ensure that the most are being made out of tax-sheltered space. There may also come a time when your client needs access to specific assets, and it will be the job of your firm to determine which account will be the most tax advantageous to draw from.

Asset location can help with:

What Your Firm Should Consider When Handling Asset Location

Investment clients trust your firm and advisors with their accounts. To ensure that using an asset location strategy will be beneficial to minimize taxes, you should look for four primary criteria. Believe it or not, there may be situations where asset location is not beneficial to your clients.

Creating a Tax Advantage with an Asset Location Strategy for Retirement

Using software applications for tax strategies like asset location can give firms and advisors the competitive edge they need. Because LifeYield helps improve tax efficiency with asset location, clients reap the benefits, as do the firms who implement them.

Why does LifeYield make it easier to handle asset location and handle a client’s unified managed household?

Part of the benefit of using LifeYield for asset location management across the unified management household results in your firm and advisors being able to keep the same software without replacing all the technology you already use. Avoid tech disruption while becoming more efficient at assessing assets for prime locations.

Where Do Capital Investments Fall Within the Realm of Asset Location?

As an advisor, you have to determine which assets need to be assigned to which tax-advantaged accounts and which to leave as taxable. LifeYield helps to identify which investments will have the highest after-tax return.

Higher Tax-Advantaged Accounts

For general reference, most of the higher tax-advantaged accounts include:

  • Individual Stock: These are reasonably tax-advantaged when they are bought and held for at least one year
  • Equity Index Mutual Funds: ETFs are also classified as a reasonably tax-advantaged option
  • Tax-Managed Equity Funds: These are ETFs that explicitly name tax advantages as a goal

Lower Tax-Advantaged Accounts

Lower tax-advantaged accounts may include:

  • Bonds and Bond Funds: The exemption is tax-free municipal bonds, funds, and US Savings Bonds. These highly tax-disadvantaged accounts are classified because they return interest payments that are taxed as ordinary income at the ordinary income tax Potentially higher returning types of bonds and investments become more tax-advantaged.
  • Actively Managed Stock Funds: Higher turnover rates are less tax-advantaged due to the higher capital gain distribution rates. If short-term gains are distributed, they are taxed as normal income at the higher income tax

Using Asset Location as a Firm Strategy with LifeYield

Asset location is not a financial practice that many people would find “fun” to talk about, let alone execute. To get excited about asset location, it takes an understanding skill set and willingness to pay attention to details to get really into it.

Asset location is not an investment strategy for getting a fast return, but quite the opposite. Those who use asset location strategies are in it for the long haul – they are retirement account material. As a firm, you need to make sure you are implementing a complete strategy. Without a systematic approach, you may end up creating unflattering circumstances for your clients.

Asset location has the potential to reduce the amount of money being lost to taxes and other poor investments. Even knowing that taxes are taking potential income without the right tools can be almost impossible to implement a working solution. LifeYield brings the solution to the table to help save investment clients additional retirement funds while reducing the overall tax burden.

LifeYield’s Technology Library

LifeYield can change the way your firm and advisors handle business. Not only can we offer asset location products to help increase the overall revenue but reduce the tax burden as well. Looking at the Taxficient Score can create the blueprint to retirement saving success.

Ready to take a leap and try a new product to help minimize the amount your investment clients are paying in taxes? Let the Taxficient Score see where their unified managed household currently sits and exactly how you can create the blueprint that will change it all.

LifeYield makes it easy for your firm and advisors to create the optimal tax environment for your investment clients, all through smart asset location strategies. Try LifeYield’s products today.

Steve is the EVP of Advisor Success at LifeYield. He's responsible for leading our Direct-to-Advisor channel and always keeps up on the latest advisor technology. Steve writes about how advisors can grow their business by building stronger relationships with clients and adopting new technology.