Broker Check

Allocation and Location: Yes they differ!

March 28, 2022

This is a revisitation to an old topic but worth circling back to. I’m just not hearing enough of this in strategy. I turn the financial networks on and I hear get rich quick ideas, or annuity hawkers hiding behind a message of some “Secret strategy only the rich use and know about.” First, I’ll address the Asset Allocation vs Asset Location chat. Second, let’s hit on the current Volatility and Fear Cycle.

So Asset Allocation vs Asset Location, sounds like semantics, yes? It’s not. It’s about what to own, and where to own it?

So much energy is spent on telling people what to buy, while hardly anyone tells you where to buy it!

Here's a little background:

  1. One hundred percent (100%) of all the money coming out from your Traditional IRAs and 401ks in the form of withdrawal distributions are taxed as "ordinary income" as you withdraw it. (ordinary income is the higher of taxation rates on asset growth compared to cap gains rates, always)
  2. All monies drawn from Roth IRAs and Roth 401ks are completely tax-free as you withdraw them (also tax-free to beneficiaries on inheritance).
  3. All Personal and Trust (after-tax accounts) are taxed based on the underlying asset itself. They are taxed as activities occur during the registration and can be Tax-Free (Muni’s) Interest (Bonds and CDs) or Cap Gains/Divs. Also, this is the only account type that allows Capital Losses and deductions to FLOW THROUGH to your tax return. Stocks are taxed at Cap Gains rates when sold, Bonds and CDs are taxed as ordinary income.

Let’s start with #3 above. If I own a stock personally, that does not pay a dividend, I pay no tax until I sell it. Or recognize no losses until I sell it. Now if I sell it after 12 months, I get Capital Gains treatment, which is very favorable compared to Ordinary Income as mentioned earlier. However, if I own that same stock in my IRA,(#1 above)  I pay much higher Income tax rates when I sell and remove the dollars. And if one dies with capital assets, under #3 above the heirs get a step-up in basis (free ride on the gains.) But if the stock is in #1 (IRA) the heirs pay current income tax on the whole enchilada.

I haven’t mentioned #2 yet, the Roth. So if I have that 5% paying investment, and I own it personally, that 5% shows up on my return every year. If it’s in my Roth, it is tax-free! (not deferred, but completely tax-free!)

The message on this topic is simple, at WNA we are “Wired” to think about this with every decision and advice conversation. If you ask us to buy “” because it may turn around and survive, we’ll probably suggest it in non-IRA so you can deduct the loss if they fail. And if you want “We make Electric Power for 100 years” public utility with a 6% dividend, we are probably going Roth if you need the 6% income. You just made that 6% tax-free by holding the utility in the ROTH! Your accounts with us are already positioned this way. So no need to fret. If you have other assets, make sure we run them through the “wringer.”

Second: I mentioned I had two thoughts today. The second is the current volatility. Up one day, plunging for two, soaring for 3, dropping again. I despise the words soaring and plunging the media uses to drive attendance to the network on the daily results. The news cycle definitely pushes “Action” like a drug dealer in an alley. I have a big prize for the person that can tell me the answers to two questions.

  1. Name the time the stock market went down and DID NOT come back up, please….…… I’m waiting………………. I hear crickets!!
  2. Name the time the stock market went down and did not come back up and set new ALL-TIME HIGHS……..Hmm…………. There are those Crickets again!

So with both answers being “NEVER” why do people lose money? Emotion? Impulse? The biggest answer we get is “John, I’m 78 and I don’t have time to wait for it to recover.” But two things can happen to you at 78….you can live 15 years and need inflation protection from the Long Term Bucket; or heaven forbid you are gone tomorrow, the 50-year-old kids and 20-30-year-old grandkids will be protected and actually need to get more aggressive.

Final thought: If you watch the news and think, “Boy oh boy, I wish I had the funds to buy this drop” isn’t that the same math as “I sure should hold through this dip.”

Have a great day!