Introducing the Smart Location Score™

The Smart Location Score™ is an easy way to understand how well investments are placed within accounts.   A higher score means more investments are placed in the accounts where they belong, and that your portfolio may be more efficient from an income tax perspective.  For example:

Your Smart Location Score™ is 48%.  In total, 48% of the portfolio is in a GOOD location, and 10% is in a BAD location.

How do we determine your Smart Location Score™?  First, let us discuss the benefits of smart investment placement.  Certain investments may be better placed in specific types of accounts for tax purposes.  At the most simplistic level, taxable bonds might be poorly placed in taxable accounts because they throw off interest income that would be taxable each year.  Taxable bonds could be better placed in a tax-deferred account to avoid income tax today.  Placing investment smartly may help improve your long term outcome.  See below for how ComposedPro implements smart asset location across your portfolio.

• Tax-exempt accounts - place investments with the highest expected return or a high expected return that are also tax-inefficient.  Investments could include US Small Cap Equities or Non-US Emerging Market Equities.

• Tax-deferred accounts - place investments with a medium-to-high expected return that are also tax-inefficient.  Investments could include US Corporate Bonds or Non-US Developed Bonds.

• Taxable accounts - place investments with a higher expected return that are also tax-efficient and always tax-exempt bonds. Investments could include US Large Cap Equities or US Municipal Bonds.  Any cash in the portfolio is also attempted to be held in taxable accounts because we prefer tax-advantaged accounts to be fully invested.

A better understanding of asset location may be obtained by viewing our Asset Location Heat Map™ by Asset Category.   This report quickly shows you how well investments are placed across your accounts.  The example below assumes equal balances across tax-exempt, tax-deferred, and taxable accounts.  The sum of the GOOD amounts divided by the total portfolio value yields the Smart Location Score™ - the percentage of the portfolio that is smartly located.

Disclosures:

Please note that higher tax-deferred balances could result in higher required minimum distributions (RMDs) in retirement.  This should be considered when implementing any contribution recommendations or other such strategies that seek to optimize across tax-exempt, tax-deferred, or taxable accounts.  If you are seeking to minimize RMDs, a contribution strategy that recommends a higher tax-deferred balance in your portfolio may not be appropriate.  Please consult your tax advisor when implementing any strategy that attempts to lower income taxes.

Clients may not realize the benefits of asset location or other strategies discussed herein. Factors that affect an asset location strategy include, but are not limited to, market performance, the relative size of each account included in the financial plan, the equity exposure of the portfolio, the frequency and size of deposits into the various accounts, the tax rates applicable to the investor in a given tax year and in future years, and the time elapsed before the liquidation of any of the accounts becomes necessary.

Nothing herein should be interpreted as tax advice.  ComposedPro does not represent in any manner that the tax consequences described herein will be obtained or result in any particular tax consequence. Please consult your personal tax advisor as to whether ComposedPro's asset location strategy is a suitable strategy for you, given your particular circumstances. The tax consequences of asset location are complex and uncertain. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. ComposedPro assumes no responsibility for the tax consequences to any client of any transaction.