As investors approach retirement, it’s not unusual for their attention to turn to how assets are allocated across different investment types and asset classes, such as stocks versus bonds or domestic versus international markets. That’s because an effective asset allocation strategy seeks to align your portfolio with your time horizon (when you will need your money) and risk tolerance (your comfort level with potential investment losses). Your risk tolerance helps to determine the mix of assets that make sense for your portfolio. 

While choosing the right mix of investments is essential to help investors pursue their goals for another 20, 30, or more years in retirement, deciding where assets are held—asset location—may help improve tax efficiency throughout this next exciting stage of life.

What Is Asset Location?

Asset location refers to where assets are held or “located,” such as a bank savings account, direct-held mutual fund, real estate property, or a brokerage account. Because asset location directly influences the long‑term management of retirement income, it’s essential to a tax-sensitive approach to managing income in retirement.

How Does It Work?

By seeking to align each asset with the most appropriate account type, asset location helps to determine thetax efficiencyof a portfolio. This may influence after‑tax outcomes for retirees seeking to draw down on their assets in a more tax-efficient manner.

A strategy that seeks to coordinate taxable, tax-deferred, and tax-free assets, may also help provide increased flexibility in adapting to evolving income needs, personal circumstances, and tax laws changes over time.

Why Tax Diversification Matters During Retirement

Tax diversification is the process of spreading investments across different types of accounts, such as taxable, tax-deferred, and tax-free, in an effort to help manage tax liabilities in retirement. A coordinated approach is important because different sources of income may be taxed differently.

During retirement, most people will derive their income from one or more of the sources listed below:

• Social Security benefits
• Retirement plans (e.g., IRA, 401(k), or 403(b) accounts)
• Pension
• Personal investments
• Income-generating real estate
• Business interests
• Required minimum distributions (RMDs)

Most retirement assets fall into one of three tax categories, each with different characteristics and potential planning considerations.

1. Taxable accounts  include individual or joint brokerage accounts and many bank or investment accounts that are funded with after-tax dollars. These accounts generally offer:

• No age restrictions for accessing funds
• Flexibility for withdrawals
• Potential capital gains tax treatment when investments are sold
• Annual taxation on certain interest, dividends, or realized gains

Although these accounts may generate taxes each year, they often provide valuable flexibility because withdrawals themselves are generally not fully taxable.

2. Tax-deferred accounts include  Traditional IRAs, SEP IRAs, SIMPLE IRAs, and many employer-sponsored retirement plans such as traditional 401(k)s are examples of tax-deferred accounts. These accounts generally provide:

• Potential tax deductions on pre-tax contributions (if eligible)
• Tax-deferred investment growth
• Ordinary income taxation on qualifying withdrawals
• Required Minimum Distributions (RMDs) beginning at the applicable age under current law

Tax-deferred accounts can be valuable asset accumulation vehicles during your working years, but distributions later in retirement may affect taxable income.

3. Tax-free accounts include Roth IRAs and Roth 401(k)s, which are funded with after-tax dollars, allowing qualified withdrawals to generally be received free from federal income tax, assuming IRS requirements are satisfied. Potential advantages include:

• Tax-free qualified withdrawals
• Greater flexibility in retirement income planning
• No Required Minimum Distributions for Roth IRAs during the owner’s lifetime under current law
• Potential tax-efficient wealth transfer opportunities

Not everyone qualifies to contribute directly to every Roth account, and conversion strategies should always be evaluated carefully.

Coordination is Key

While asset location and tax diversification are important considerations for any retirement income strategy, they don’t exist in a vacuum. A comprehensive approach requires careful  coordination and evaluation of these and other aspects of wealth planning:

• Goal planning
• Income/cash flow planning
• Estate planning/legacy objectives
• Investment management
• Ongoing tax planning

Taking a holistic view of your financial situation and goals may help support more informed decisions aligned with your values and objectives.

Building Flexibility in Retirement

Keep in mind that state and federal tax laws evolve over time, and retirement may last for several decades. While no one can predict future tax law changes with certainty, building flexibility into your financial strategy may make it easier to adapt as tax laws evolve. Maintaining assets across multiple tax categories may also create more options when making future income decisions.

At Return on Life Wealth Partners, we focus on compressive financial planning that seeks to coordinate each piece of your financial puzzle. If you’d like to learn more about the role asset location can play in a tax efficient retirement income strategy, we welcome the opportunity to talk about what matters to you.

Important Disclosure

This material is provided for informational and educational purposes only and should not be construed as tax, legal, or accounting advice. Return on Life Wealth Partners does not provide tax or legal advice. Individuals should consult with their qualified tax and legal professionals regarding their specific circumstances before implementing any planning strategy. References to tax laws are based on current regulations, which are subject to change.

Investing involves risk, including the possible loss of principal. Any strategies discussed may not be suitable for all individuals.

Information is believed to be accurate as of the date of publication but may not be complete or updated for subsequent changes in law or regulation. Any forward-looking statements are based on current assumptions and are subject to risk and uncertainty. Past performance is not indicative of future results.

Investment advisory services are offered through Planned Financial Services, LLC, dba Return on Life Wealth Partners, an SEC-registered investment adviser.

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