Recent tax increases have made the overall tax bite more painful for many clients, with rates higher on ordinary income, long-term capital gains and qualified dividends, not to mention the Medicare surtax. Because the tax calculus for various types of investment income has also changed, planners should pay renewed attention to asset location - whether to place particular investments in taxable or tax-deferred accounts.
By putting an asset into the type of account that will give it the best tax treatment, planners say, clients might be able to realize 20 to 50 basis points of additional return each year. That may not sound like much, but after 30-plus years, the tax savings can add up. In fact, Morningstar considers asset location a key element of its new "gamma" factor - a way to calculate an advisor's value that Morningstar argues can, in total, boost final retirement income by 29%.
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