Are you saving money in the right type of investment accounts for your future? It's a question that doesn't get enough attention, but it can have a significant impact on your financial well-being. In this post, we're going to explore the concept of asset allocation vs. asset location and why it's crucial to get it right.

Understanding Asset Allocation vs. Asset Location

Asset allocation is all about the mix of investments you have in your portfolio – stocks, bonds, real estate, and more. It's like creating the perfect recipe for your financial success. However, asset location is where those investments are housed, and this is where it gets interesting. It's not about what you invest in; it's about where you invest it from a tax perspective. 

Imagine you have a toolbox, and each tool has a specific purpose. Your investments are the tools, and your accounts are the compartments in the toolbox. Now, here's the kicker: the same tool might work differently depending on where you keep it. An investment that's great for a 401k might not be ideal for a non-qualified brokerage account because of tax implications.

The Two Key Questions to Ask

1.  Is my asset allocation suitable based on my account location? Consider the tax consequences of your investments. Are they tax-efficient, or are they generating unnecessary tax liabilities? Think about CDs, dividends, turnover, and growth.

2.  Am I saving too much in one type of account? Diversification isn't just about spreading your investments; it's also about diversifying your tax exposure. Saving too much in one type of account can lead to significant tax burdens in the future.

Finding the Right Balance

Balancing your asset allocation and asset location is an ongoing process. You should regularly evaluate your savings strategy based on changes in your income. Did you experience a temporary income boost that might warrant a shift in your savings strategy? Did you have a lower tax year that suggests you should contribute more to your Roth account? 

Financial planners often ask these questions at least once a year for their clients because finding the right mix between current tax benefits and future tax benefits is crucial. When you eventually withdraw that money, you want flexibility and options, not financial constraints.

Wrapping up, to make the most of your retirement savings, ensure that your asset allocation is optimized for the specific account in which it resides. Also, take the time to evaluate the amounts you're saving in each account to strike the perfect balance between immediate tax benefits and future financial security.

 Remember, it's not just about what you invest in; it's about where you invest it. So, take a closer look at your retirement savings strategy today to secure a brighter financial future tomorrow.


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Ready to fine-tune your retirement savings strategy and optimize your asset allocation vs. asset location? Connect with Certified Financial Planner Nick Davis and our team in the Dallas-Fort Worth area. Start here for a personalized consultation!