How Asset Location Can Minimize Taxes

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:

1. Managing the larger picture – Before your firm can put your client’s assets in their final location, you have to determine the allocation based on each unique investment goal and risk tolerance. That is why allocating the assets come before the location part of the equation.
2. Planning goals and keeping to a timeframe – What is the goal of the accounts? How long will your client keep these funds in the account before withdrawing them? Even though the asset location is important, it tends to fall short on the priority scale.
3. Managing tax-sheltered accounts – Which accounts have the most opportunities? As tax codes evolve, it gets imperative that firms and advisors keep up with the changes and educate themselves frequently.

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.

• Your client is currently paying higher marginal income tax. The higher the marginal tax income rate, the bigger potential asset location strategies may offer. The more money earned, the higher the marginal tax bracket the client ends up in. This results in additional income being significantly reduced due to higher tax
• You think that your investment client will pay a lower tax rate in the future. If you have an inkling that your client will be paying less tax in the future, using an asset location strategy may make it possible to reduce or defer the taxes An example of this is when an investment client retires – they experience a drop in interest rates.
• The client has a significant amount of tax-inefficient assets that are in taxable. For those tax-inefficient accounts like bonds or bond funds, there is a greater chance to increase the client’s after-tax returns by utilizing the Taxficient Score. Your firm can do this by executing an asset location
• There is an expectation that the investment will be vested for more than ten years. There are no instant rewards from an asset location strategy, not even with taxes – so if your client is looking for an instant return, they won’t find it. The longer that assets are vested, the greater the potential for tax

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?

1. Your firm and advisors use LifeYield’s proprietary asset location algorithm, scanning all accounts within the unified managed household to find the tax-smart location for every asset within the portfolio within seconds.
2. The Taxficient Score can be used to create the blueprint of how to improve the tax efficiency of the overall household and assets.
3. Use the score and blueprints to quantify the benefits in dollars, giving your investment clients a real-time idea of what optimizing for tax efficiency can provide through finding the correct location for every asset

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.

• Lots of Missing Pieces – The best approach for asset location involves looking at the unified managed household. Depending on how long these financial assets have been accumulating, they can end up spreading out. It can be hard to get a complete picture without looking at the entire picture to envision how your investments fit your retirement plan.
• Lacking Needed Expertise – Even with the most up-to-date picture of accounts and holdings, asset location is not a simple thing to implement. Finding the right answer for each client will depend on what complex wealth management needs exist and how advantageous it is to optimize the accounts.
• You End up Missing Oversight – Asset location is not a one-and-done solution for any account. To be tax efficient, it requires saying the course. The constant change in the market and regulations require ongoing training and review to keep things moving smoothly.

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.

• LifeYield Multi-Account Rebalancing – This product operates alongside any current rebalancing technology you use. It combines multi-account tax harvesting and automated asset location optimization.
• LifeYield Tax-Smart Withdrawals – Execute withdrawals optimized from multiple accounts by selling mislocated assets, minimizing drift, and identifying loss harvest opportunities.
• LifeYield Tax Harvesting – This product works with all the other LifeYield technology to scan all non-taxable and taxable accounts and instant identification opportunities to harvest the losses and the gains.
• LifeYield Social Security+ – Identifies the optimal filing strategy for every client and enables the transition to a full retirement income with visual income layers.

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.