The Cash Flow Clock: For Retirees - Book - Page 76
The Cash Flow Clock
Asset Location and the Cash Flow
Clock
While asset allocation focuses on maximizing risk
efficiency in a portfolio, asset location seeks to
maximize tax efficiency. Tax deferred investments
are taxed only when they are withdrawn from the
account. Roth accounts are not taxed at all. Assets
can be bought and sold and dividends can be earned
within these accounts without any tax consequences.
Transactions in non-qualified assets (those not in
401k, IRA, or Roth accounts) are subject to tax
consequences as they occur. This alone should play a
role in determining the types of investments we
choose in each account.
Any changes in non-qualified accounts should not be
made without accounting for the tax implications. A
dividend producing stock may be a great investment
from a risk standpoint. However, if the dividend
income is reported each year, especially at a time
when our tax rates are high, it reduces the benefit of
the investment. It’s not just about how much we can
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