Reduce taxes with strategic asset location

Strategic asset allocation across tax-sheltered and taxable accounts can help reduce taxes.

Alex Bryan 12 June, 2018 | 5:00PM

Taxes are no fun. They may be an inevitable part of life, but savvy investment planning can reduce their impact. This type of planning requires holistic thinking about all your assets, considering asset allocation not only across asset classes and investment strategies but also across investment accounts. Tax-sheltered accounts, like RRSPs, TFSAs and company pension plans, are a good place to park less tax-efficient investments, like bond, dividend and actively managed funds. Taxable accounts should be reserved for more-tax-efficient strategies, including low-turnover equity index ETFs.

This is a simple idea, but one that is often overlooked in practice. Too often investors fall into the trap of focusing on each individual account, trying to diversify locally, while losing sight of the bigger picture. It's OK if a taxable account is a bit equity-heavy if it's offset by a larger bond allocation in a tax-sheltered account and you can tolerate the added risk in the taxable account.

It is important to balance risk tolerance against the tax advantages of using different accounts to hold different types of assets because the money in tax-sheltered accounts may not be as easily accessible as money in a taxable account. If you need the money in the taxable account sooner, make sure that it is invested in a manner consistent with your risk tolerance over that horizon.

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About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.

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