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Where You Hold Investments Changes What You Keep (Asset Location) · Align Your Retirement

• 0:00
  Speaker: Hey, welcome back to Align Your Retirement.
• 0:02
  Speaker: I'm Hazel Secco, CFP and CDFA, founder of Align Financial Solutions, a fee-only fiduciary firm for women in their 40s and 50s who are serious about getting their retirement right.
• 0:13
  Speaker: Today's episode is about the gap between what your portfolio earns and what you actually keep, and the one structural lever that closes it year after year without changing your allocation or taking more risk.
• 0:31
  Speaker: Most women with one and a half million dollars underestimate this lever because no one ever asked them the right question.
• 0:38
  Speaker: Let's get into it.
• 0:39
  Speaker: Here's a question almost no one asks, and it's costing more women in your position real money.
• 0:46
  Speaker: Not how should I invest?
• 0:48
  Speaker: You've answered that.
• 0:50
  Speaker: You have a stock and bond allocation, you have an international component, you have some cash, the allocation is set.
• 0:58
  Speaker: The question is, where are you holding each piece of that allocation?
• 1:02
  Speaker: Which of your investments are sitting in your 401k or traditional IRA?
• 1:08
  Speaker: Which are in your Roth?
• 1:09
  Speaker: Which are in your taxable brokerage?
• 1:12
  Speaker: Which are in your HSA?
• 1:14
  Speaker: If the answer is, I don't know, or more commonly, the same allocation is in every single account.
• 1:21
  Speaker: You're paying for a retirement inefficiency that compounds every single year.
• 1:26
  Speaker: That inefficiency has a name.
• 1:28
  Speaker: It's called asset location.
• 1:30
  Speaker: And the research on it is clear.
• 1:34
  Speaker: Done right, it can add somewhere between a quarter and three-quarters of a percent to your after-tax returns every year.
• 1:42
  Speaker: Compound it over 20 or 30 years of retirement.
• 1:46
  Speaker: That's years of additional runway without changing your allocation, without taking more risk, without investing differently.
• 1:53
  Speaker: It's a free raise, and most women leave it on the table because their target date fund or their advisor never asked the question.
• 2:02
  Speaker: So today I'm going to walk you through three things.
• 2:06
  Speaker: One, the principle, why the same dollar earns a different after tax return depending on where you hold it.
• 2:14
  Speaker: Two, the framework, which type of investment belongs in which type of account and why.
• 2:20
  Speaker: Three, the three common mistakes most women make with asset location.
• 2:25
  Speaker: Mistakes that compound quietly for decades.
• 2:28
  Speaker: Let's get into it.
• 2:29
  Speaker: Quick note on who this episode is built for.
• 2:32
  Speaker: If you have at least three of these, a 401k or 403B, a traditional IRA, a Roth IRA, a taxable brokerage account, and HSA, this episode is built for you.
• 2:44
  Speaker: The more account types you have, the more asset location can do for you.
• 2:49
  Speaker: If you have everything in one account type, say everything in a 401k, the decisions are narrower, but you probably have a Roth rollover opportunity you haven't used yet.
• 2:59
  Speaker: Follow this episode for then.
• 3:00
  Speaker: For everyone with the multi-account types, stay with me.
• 3:04
  Speaker: This is the episode that changes the math quietly for the next 20 years.
• 3:08
  Speaker: Here's the principle in one sentence.
• 3:11
  Speaker: Your portfolio has a gross return with the investments actually earn and a net return, what you get to keep after taxes.
• 3:20
  Speaker: The gap between the two is tax drag.
• 3:24
  Speaker: Asset location is the lever that shrinks the drag.
• 3:27
  Speaker: Here's why different accounts produce different net returns on the same investment.
• 3:32
  Speaker: Three main account types, three different tax treatments, traditional 401k and traditional IRA.
• 3:38
  Speaker: You didn't pay tax on contributions.
• 3:41
  Speaker: You don't pay tax on growth, dividends, or interest along the way.
• 3:46
  Speaker: But every dollar you pull out in retirement is taxed as ordinary income.
• 3:50
  Speaker: The tax hit is 100% deferred until withdrawal.
• 3:55
  Speaker: Roth IRA and Roth 401k, you pay tax on contributions.
• 4:00
  Speaker: You don't pay tax on growth, dividends, or interest along the way.
• 4:04
  Speaker: And you don't pay tax when you pull it out in retirement.
• 4:08
  Speaker: Every dollar of growth is tax-free forever.
• 4:11
  Speaker: Taxable brokerage.
• 4:13
  Speaker: You pay tax on the money going in.
• 4:15
  Speaker: It's already after tax.
• 4:17
  Speaker: Dividends and interest are taxable every year.
• 4:20
  Speaker: Capital gains are taxable when you sell.
• 4:22
  Speaker: Long-term gains get a preferential rate.
• 4:25
  Speaker: Short-term gains are taxed as ordinary income.
• 4:28
  Speaker: Now, layer an investment on top of each.
• 4:31
  Speaker: Imagine a bond fund paying 4% interest.
• 4:34
  Speaker: That 4% interest is taxed as ordinary income every single year in a taxable brokerage account.
• 4:41
  Speaker: At a 32% federal bracket, almost a third of your bond return disappears to taxes annually.
• 4:47
  Speaker: If you hold the same bond fund in an IRA or 401k, the interest compounds tax deferred.
• 4:54
  Speaker: If you hold it in a Roth, the interest compounds tax-free forever.
• 4:59
  Speaker: Same bond, three different net returns.
• 5:02
  Speaker: Now, imagine a broad US stock index fund.
• 5:07
  Speaker: Its dividends, maybe one and a half to two percent a year, are mostly qualified, which means they're taxed at preferential long-term capital gains rates.
• 5:16
  Speaker: Most of the return is capital appreciation, which you don't pay tax on until you sell.
• 5:22
  Speaker: And when you do sell, long-term gains get the preferential rate.
• 5:26
  Speaker: The same stock index fund held in a taxable brokerage produces a net return that's very close to its gross return.
• 5:34
  Speaker: The tax drag is small.
• 5:36
  Speaker: Hold the same stock index fund in a traditional IRA, though, and every dollar that eventually comes out as taxes, ordinary income, not at the preferential long-term capital gains rate.
• 5:48
  Speaker: You've just taken a naturally tax-efficient investment and wrapped it in a tax structure that converts its favorable long-term capital gains into ordinary income.
• 5:57
  Speaker: You've paid a tax premium for the privilege of tax deferral you didn't need.
• 6:03
  Speaker: This is the core asymmetry.
• 6:06
  Speaker: Tax inefficient investments, things that throw off lots of interest or short-term gains belong in sheltered accounts, meaning traditional IRA 401k Roth.
• 6:17
  Speaker: Tax efficient investments, broad stock index funds, tax managed funds, individual stocks held long-term, can live comfortably in a taxable brokerage.
• 6:27
  Speaker: Most women with $1.5 million and over are doing the opposite by accident.
• 6:32
  Speaker: Their target date fund in their 401k holds a mix of stocks and bonds.
• 6:37
  Speaker: Their Roth IRA from an old rollover holds the same stock bond mix.
• 6:42
  Speaker: Their taxable brokerage holds the same stock bond mix.
• 6:45
  Speaker: The same allocation in every account, which means they're paying ordinary income rates on stock returns in the IRA and they're paying current year tax on bond interest in the taxable account.
• 6:58
  Speaker: Both mistakes at the same time.
• 7:01
  Speaker: Traditional 401k and traditional IRA, your tax-deferred accounts.
• 7:14
  Speaker: Hold the tax inefficient investments here.
• 7:17
  Speaker: Bonds and bond funds, interest as ordinary income, and this shelters it.
• 7:22
  Speaker: REIT, real estate investment trusts, non-qualified dividends taxed as ordinary income.
• 7:29
  Speaker: Actively managed mutual funds that generate short-term capital gains.
• 7:34
  Speaker: Treasury inflation protected securities.
• 7:37
  Speaker: Tips.
• 7:37
  Speaker: Their inflation adjustments are taxable annually, even if you don't sell.
• 7:41
  Speaker: High turnover strategies.
• 7:43
  Speaker: The logic you're already going to pay ordinary income tax when the money comes out, might as well shelter the investments that would have been taxed at ordinary income rates anyway.
• 7:54
  Speaker: Roth IRA and Roth 401k, your tax-free forever accounts.
• 8:00
  Speaker: Hold the highest growth investments here.
• 8:02
  Speaker: Small cap equities historically higher, longer-term returns, emerging market equities, individual growth stocks, you expect to be long-term winners.
• 8:12
  Speaker: International equities, if you have a high conviction on them, the logic.
• 8:16
  Speaker: Every dollar of growth in the Roth is tax-free forever.
• 8:20
  Speaker: You want the most growth happening in the bucket where none of it is ever taxed.
• 8:24
  Speaker: Don't hold bonds in the Roth.
• 8:27
  Speaker: You're wasting the single best tax structure in the US tax code on a 4% return.
• 8:33
  Speaker: Taxable brokerage, the naturally tax-efficient bucket, hold the tax-efficient investments here.
• 8:40
  Speaker: Broad U.S.
• 8:41
  Speaker: stocks index funds, ETFs preferred, more tax efficient than mutual funds.
• 8:46
  Speaker: Tax managed funds.
• 8:48
  Speaker: Individual stocks held long-term for capital gains treatment.
• 8:52
  Speaker: Municipal bonds, if you're in a high tax bracket, federal tax-free interest, state-specific rules apply, and there's an AMT consideration for certain private activity munis.
• 9:02
  Speaker: The logic is that these investments produce mostly long-term capital gains or qualified dividends, which get preferential rates and you have full control over when you sell.
• 9:13
  Speaker: You can also harvest losses, a strategy you cannot use in IRAs and 401ks.
• 9:19
  Speaker: HSA, the forgotten superpower.
• 9:22
  Speaker: If you have an HSA and you can afford to pay current medical expenses out of pocket, let the HSA invest and grow.
• 9:30
  Speaker: HSAs have triple tax treatment if used for qualified medical expenses, tax deductible going in, tax-free growth, tax-free withdrawal.
• 9:40
  Speaker: Hold high growth equity-focused investments in your HSA if it's built to grow, not to spend in the next year or so.
• 9:48
  Speaker: The tax treatment is unique among retirement vehicles.
• 9:52
  Speaker: For most women in my client base, the HSA is underfunded and sitting in a money market earning essentially nothing.
• 9:59
  Speaker: That's a mistake.
• 10:01
  Speaker: The company stock exception, NUA, one specific asset location consideration worth flagging.
• 10:08
  Speaker: If you hold highly appreciated company stock inside your 401k, there's a strategy called net unrealized appreciation, NUA, that can let you move that stock into a taxable brokerage and pay long-term capital gains on the appreciation instead of ordinary income rates when you eventually withdraw.
• 10:27
  Speaker: NUA only works with specific conditions, has a specific execution window, and is not right for everyone.
• 10:34
  Speaker: But if you have six or seven figures of highly appreciated employer stock in your 401k, it's a conversation to have with an advisor before you roll the 401k to an IRA.
• 10:45
  Speaker: Once you roll, NUA is gone.
• 10:48
  Speaker: Mistake one, the same allocation in every account.
• 10:51
  Speaker: This is the default.
• 10:52
  Speaker: Target date funds, do this.
• 10:55
  Speaker: Rebalance everything to 6040 advice, does this.
• 10:58
  Speaker: It feels safe, but it wastes the asset location opportunity entirely.
• 11:03
  Speaker: The fix is that think of your entire portfolio across all accounts as one portfolio.
• 11:08
  Speaker: Set the overall allocation at the level of the whole pie.
• 11:12
  Speaker: Then use the three account types to hold the right slices: tax inefficient stuff and deferred accounts, growth in Roth, tax efficient and taxable.
• 11:22
  Speaker: The overall allocation stays 60-40 or you know whatever you want.
• 11:26
  Speaker: The location shift.
• 11:28
  Speaker: This is a one-time reallocation conversation followed by annual reviews, not a daily or weekly thing.
• 11:35
  Speaker: Mistake number two, holding municipal bonds in an IRA or 401k.
• 11:40
  Speaker: Municipal bond interest is federally tax-free.
• 11:43
  Speaker: That's the entire point of munis.
• 11:45
  Speaker: They have a lower yield than corporate bonds because the yield is tax-free.
• 11:50
  Speaker: If you hold munis in an IRA, you get the lower muni yield and pay ordinary income tax when you pull it out.
• 11:57
  Speaker: You've simultaneously given up the only advantage of municipal bonds and kept all the downsides.
• 12:04
  Speaker: If you've inherited a portfolio with munis in a traditional IRA, that's a conversation.
• 12:09
  Speaker: The fix is usually to sell the munis and replace with taxable bonds inside the IRA and hold munis in the taxable brokerage instead.
• 12:18
  Speaker: Mistake number three, not using the HSA as a retirement vehicle.
• 12:23
  Speaker: If your HSA sits in cash or a money market earning 1% or less, you're leaving the best tax advantage account type in the code unused.
• 12:32
  Speaker: The playbook for a woman in my client base with a high deductible health plan.
• 12:37
  Speaker: Max the HSA every year.
• 12:39
  Speaker: Pay current medical expenses out of pocket if the cash flow allows.
• 12:44
  Speaker: Invest the HSA in equities, let it grow for 15 to 20 years, by retirement, it's a meaningful tax-free for medical expenses bucket.
• 12:53
  Speaker: If that's not on your radar yet, it should be.
• 12:56
  Speaker: Here's the quiet thing about asset location.
• 12:58
  Speaker: The payoff doesn't show up in year one.
• 13:01
  Speaker: It doesn't show up in year five.
• 13:02
  Speaker: It shows up in year 20 and year 25 when the compounding of that quarter of a percent or half a percent improvement has accumulated into meaningfully larger after tax portfolio, which is why it gets skipped.
• 13:16
  Speaker: It's not exciting, it's not urgent.
• 13:18
  Speaker: It doesn't move the needle on the quarterly statement.
• 13:21
  Speaker: Your advisor doesn't have a chart showing here's how much asset location saved you this quarter.
• 13:27
  Speaker: But retirement is a 30-year project, and the decisions that matter most in a 30-year project are almost never the ones that feel most urgent.
• 13:36
  Speaker: Asset location is the kind of decision the 62-year-old version of yourself will look at the results of and think, I'm glad the 55-year-old version of myself spent an afternoon setting this up.
• 13:50
  Speaker: Spend the afternoon, set it up, then let it compound.
• 13:54
  Speaker: Two things you can do after this episode.
• 13:56
  Speaker: First, if you want to know whether your current account mix is structured correctly for tax efficiency, the retirement readiness assessment covers asset location alongside the other retirement planning decisions that matter.
• 14:08
  Speaker: Free, self-paced 10 minutes.
• 14:10
  Speaker: Link in the show notes.
• 14:12
  Speaker: Second, if you want me to look at your specific account mix and tell you where the misplacements are, the Align call is 15 minutes, you'll leave knowing what to move and why.
• 14:23
  Speaker: Link is right next to the assessment.
• 14:25
  Speaker: Next episode, the inherited IRA 10 year rule.
• 14:29
  Speaker: If you inherit a retirement account from a parent or you're planning to leave one to your kids, the Secure Act changed the game in 2020.
• 14:38
  Speaker: And most people are either unprepared to receive it, unprepared to leave it, or both.
• 14:44
  Speaker: See you there.