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ASSET LOCATION
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• Taxes reduce investment returns, so building a tax-efficient portfolio helps you keep more of your money and
may improve your chances of meeting your financial goals.
• Tax efficiency should not be the only objective of an investment plan. Even more important are your
long-term financial goals, time horizon and risk tolerance.
• Asset location can become especially important during retirement, when portfolio withdrawals begin.
• Given the complexity of tax rules and their frequent changes, it may be advantageous for investors to seek
help from a professional financial advisor and/or tax advisor.
I
t’s not just how much your investment
portfolio earns that counts, it’s also how
much of those returns you get to keep.
Increasing the amount of returns that stay with you
is the purpose of asset location — the spreading of
assets across a mix of taxable, tax-deferred and tax-free
investments to help minimize the amount paid in taxes.
Building a tax-efficient portfolio may help you keep
more of your money, increasing your chance of meeting
your financial goals.
Keep in mind that, for most investors, taxes shouldn’t be
the sole factor used in developing an investment plan.
Most investment plans, which include asset location
decisions, should primarily be based on the investor’s
financial goals, time horizon and risk tolerance.
date on changes in tax laws and how they may affect
their investments. New laws or laws scheduled to expire
may have an impact on your income and investment
portfolios, which could impact your ability to meet
your financial goals. Examples of such changes include
increases in marginal income tax rates, changes
to capital gains treatment and limits on itemized
deductions. Given the complexity of the tax rules and
their susceptibility to change from year to year, we
strongly encourage members to consult their tax and/or
legal advisor to discuss their specific situations before
shifting assets between taxable and tax-deferred or
tax-exempt accounts.
TA X I M P L I C AT I O N S
As part of determining their optimal asset location
structure, investors should understand the account
types and investments they own and the related tax
implications. They should keep themselves up to
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The impact of tax-efficient investing over time.
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The importance of tax-efficient investing becomes clear when looking at its impact on the growth of investments over time.
Hypothetical illustration only. Returns shown are not guaranteed, and variation from the assumptions stated would produce different results.
Example Scenario
A member invests $5,000 in after-tax dollars at the
beginning of each year in a 60/40 stock/bond fund,
held in either a Roth IRA (tax-exempt) or taxable
investment account.
> The stock portion of the fund grows 6% annually with
a 2% annual dividend.
> The bond portion of the fund has a 4.5% annual
taxable yield.
> All gains are reinvested in both accounts.
> We assume an ordinary tax rate of 25% and 15%
capital gains/qualified dividends rate.
Improving the Outcome
The ending values for the taxable account shown
represent the liquidation value after paying long-term
capital gains on the appreciation of stock at the end of
the particular year (year 10, 20 or 30). This example does
not take into account capital loss carryover or other tax
strategies that could reduce taxes potentially incurred
in a taxable account.
Other Considerations
> Changes in tax rates and tax treatment of investment
earnings may impact the comparative results.
> Consider your current and anticipated investment
horizon and income tax bracket when making an
investment decision, as the illustration may not reflect
these factors.
> State and local taxes, transaction costs, fees and
inflation are ignored.
account. Examples of tax-deferred or tax-exempt
accounts include IRA, 401(k) and Thrift Savings Plan
(TSP) accounts and their respective Roth varieties, as
well as municipal bond funds.1
TA X- E F F I C I E N T
INVESTING
Generally speaking, investments that produce taxexempt income or that can be taxed at capital-gains
rates may be advantageous to hold in a taxable
account, while investments that produce income that
is taxed at ordinary income rates may be advantageous
to hold in a tax-deferred or potentially tax-exempt
There is, however, plenty of room for exceptions to
these general guidelines. For example, taxable bonds
would be good candidates for a tax-deferred account
because their interest payments are taxed at ordinary
income rates. But if you want to use the interest
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investors should consult with their investment advisors
prior to making any purchase.
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payments from these bonds as current income,
it might be more efficient to hold them in a
taxable account.
If you are in the 33% or higher tax bracket, you may
want to do additional asset location planning to
minimize your exposure to the federal 3.8% Net
Investment Income Tax that went into effect in 2013.
General strategies to consider for reducing current net
investment income include accumulating earnings
in IRA, Thrift Savings Plan, 401(k) or other qualified
retirement accounts that are not subject to Net
Investment Income taxation upon distribution, and
using tax-deferred insurance products to defer income
to later years. Such products include permanent life
insurance, which includes a savings component whose
cash value builds up over time, and fixed annuities.
An immediate fixed annuity, for example, can reduce
longevity risk by providing a guaranteed income
stream for a specified period, or potentially for one or
more lifespans, and can also reduce your portfolio’s
overall market risk because the annuitized portion is
not subject to the market’s ups and downs.2 Deferred
annuities may serve as a substitute for either the fixedincome or equity portion of the portfolio, and some
deferred annuities may allow the investor to transfer
some investment risk to the insurer. It is important to
fully understand the type of annuity offered, how it
works and the contract details.
CONCLUSION
D I V E R S I F I C AT I O N
AND ANNUITIES
For some investors, fixed annuities may make sense as
a way to diversify their sources of retirement income.
Life expectancy continues to increase, making longevity
risk — the risk of outliving your retirement savings — a
very real concern for many investors. Annuities come in
a variety of styles and are contractual agreements, so
Asset location becomes especially important during
retirement, when some members decide to make
portfolio withdrawals. Members should consult with
their financial and tax and legal advisors to understand
how distributions from taxable and non-taxable
accounts can impact not only taxes but also the overall
portfolio’s performance and its sustainability.
We’re here for you.
Our disciplined approach is built on a tradition of military values and helping our members achieve their financial goals.
877-633-3312 | usaa.com/wealth
Investments/Insurance: Not FDIC Insured ∙ Not Bank Issued, Guaranteed or Underwritten ∙ May Lose Value
USAA Wealth Management is a service of USAA. USAA means United Services Automobile Association and its affiliates. Financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known
as USAA Financial Insurance Agency in California, License # 0E36312), and USAA Financial Advisors, Inc., a registered broker dealer.
Asset allocation does not protect against a loss or guarantee that an investor’s goal will be met. Systematic investment plans do not assure a profit or protect against loss in declining markets.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe and the applicable tax law of your state may
differ from federal tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.
1
Some income may be subject to state or local taxes or the federal alternative minimum tax.
2
Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations and the insurer’s claims-paying ability and financial strength.
Annuities are suitable for long-term investing, particularly retirement savings. An annuity is a long-term insurance contract sold by an insurance company designed to provide an income, usually after retirement,
that cannot be outlived. There are fees, expenses and surrender charges that may apply. Money not previously taxed is taxed as income when withdrawn. Withdrawals before age 59½ may be subject to a 10%
federal tax penalty. Money not previously taxed is taxed as income when paid. Annuities do not provide any tax-deferral advantage over other types of investments within a qualified plan.
© 2015 USAA. 223126-1015
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