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Asset Location Definition
An asset is a resource with an economic value which an individual, a corporation or country owns or controls with the expectation that it will provide the future benefits. It is a balance sheet item which a firm owns. Asset location is a term which is used in personal finance. Asset location refers to how the investors distribute their investments across savings vehicles including the taxable, tax-exempted and tax-deferred accounts, charitable remainder trusts and lead trusts, variable life insurance policies and foundations.
There are different types of tax rates which vary according to the income internationally. The broad conclusions have been drawn about where to locate an asset depending on the nature and amount of income being generated.
The asset location is insignificant only when capital gains and losses are taxed on an accrual basis and at the same tax rate that applies to ordinary income. The complications arise where capital losses can only be applied towards realized the capital gains where the capital loss carryover may not be permitted and where there are deduction limitations dependent on the wealth or income level.
The asset location is a tax minimization strategy which takes an advantage of the fact that different types of investments get different tax treatments. By using this asset location strategy, an investor can determine which securities should be held in tax-deferred accounts and which securities should be held in taxable accounts in order to maximize the after-tax returns.
Asset location is different from the asset allocation. The former is a strategy which determines the proper account to place the investments to get the most favourable tax treatment overall, whereas the latter is an investment strategy which attempts to balance the risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investors risk tolerance, the goals and investment time frame.
An investor with a balanced portfolio which consists of 60% stocks and 40% bonds might hold the investments in both the taxable accounts and the tax-deferred accounts, gets the maximum benefits out of the asset location. Investors with all the fixed income or all equity portfolios can still benefit not with that of the asset allocation.
