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Asset Location
59 Plays16 days ago
Phillip Ramsey and Cody Kowalski explore strategies for asset allocation and asset location in the latest Uncommon Wealth Podcast. They discuss how asset location offers a tax-efficient approach to investment growth by strategically placing equities and bonds across Roth accounts, IRAs, and taxable accounts. Learn how this method can impact required minimum distributions and overall retirement planning. Perfect for those interested in optimizing their investment strategies, especially within higher tax brackets. Tune in to understand how to align your portfolio with your long-term financial goals.
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Transcript
Introduction to Uncommon Wealth Podcast
00:00:00
Speaker
Everyone dreams of living an uncommon life and the best asset you have to achieve your dreams is you. Welcome to the Uncommon Wealth Podcast.
00:00:12
Speaker
We're going to introduce you to people who are living uncommonly. We're also going to give you some tools and strategies for building wealth and for pursuing an uncommon path that is uniquely right for you.
00:00:27
Speaker
Hello and welcome everybody
Meet the Hosts: Philip Ramsey and Cody Kowalski
00:00:28
Speaker
to another episode Uncommon Wealth Podcast where I'm your host, Philip Ramsey. And this is Cody Kowalski. Holy cow. Cody Kowalski in the house. Cody Kowalski is here. Gotta love it. New Uncommon Wealth Partners building. It's pretty exciting. South Ankeny Boulevard. Okay,
Why Cody Kowalski is a Key Guest
00:00:42
Speaker
two reasons why i want Cody Kowalski to be on this podcast.
00:00:46
Speaker
ah One, because it's a little heavier topic. Yes. So we're not going to try to go in the weeds. We're going to try to like pull out. our Our job is as soon as you start going weeds, we pull them out. Keep it keep's it approachable. exactly right. That's right. Second reason is because every time Cody's on the podcast, things go viral. Yeah, what happens, Phil? It just goes to the most. It just blows just blows up. We have like 15 clients calling.
00:01:09
Speaker
Gosh. Just throwing money at us. It gets outlandish. And so, lean hey, we're ready to open the doors up. Yeah. Let's bring Cody Kowalski back. And he's also an employee now. He's done. He's graduated. That's right.
00:01:20
Speaker
It's a pretty big The young buck has graduated. The young buck has graduated. Licensed. Oh, yeah. He can do the whole thing. Becoming. It's coming. Yeah. So, anyway, thanks for being on the show. You're always welcome.
00:01:32
Speaker
Is that what you did? What's that? We're always welcome. You're always welcome. Don't worry about it. Doesn't matter. Okay. So
Inspiration from Cody Garrett and Sean Mullaney's Book
00:01:39
Speaker
we're going to start with how in the world did this concept even come up? We're never going to tell you what the concept is. Cody read this book before he went back to college.
00:01:48
Speaker
Tax penning to and through early retirement by Cody Garrett and Sean Mullaney. ah Really awesome. Like he was super excited about it. So I will have you talk about this book. Yeah. And what you thought about it and maybe kind of a nugget that you were like, maybe we can implement this at Uncommon Wealth. Yeah. I feel like whenever you Google something or you're like diving into something, like there's always like this perspective here, and this perspective here, and you're trying to bring it together. And I feel like this gave us a framework of start to finish of starting when you're investing to when you're graduating. Yeah.
00:02:23
Speaker
and how you plan for taxes accordingly. So it's really helpful. And along that journey, they talk through some different strategies.
Understanding Asset Allocation
00:02:30
Speaker
And one of them that we found super helpful was asset location. Yeah, it is. It is powerful.
00:02:36
Speaker
But before we jump into that topic specifically, we want to talk about asset allocation. And that's, I think, a concept a little bit more people are familiar with. Yeah. So asset allocation. It's all about the roller coaster. It's all about the roller coaster. What kind of roller coaster do you want your money on?
00:02:52
Speaker
And if you put your money on the wrong roller coaster, you get sick. And you're going to freak You're out. You're going get scared. So how we do it Uncommon Love part Partners is we have you take a survey, and that survey kicks out a number.
00:03:05
Speaker
That number is a percentage on equities and bonds. What but are equities? Great question. Equities are historically something that grows a little faster than bonds, but they're a little bit more volatile.
Equities vs. Bonds: Growth and Volatility
00:03:17
Speaker
Also called stocks. Yes. Right. Bonds are something historically that grow a little slower, but less volatile. Yep. So when you kick out this survey or kind of the end of the survey, it gives us a percentage.
00:03:30
Speaker
ah For this example, we'll say a 65%, always the equities are first. Yep. Then the bonds are second. So if 65% are in equities, are going to be in bonds. And so then when the market goes down, you know say we have a stock market crash because of the AI bubble, everything's going on, everything's crazy. What happens then when you're in a 65-35? It will go down.
00:03:52
Speaker
It will go down, but not as much. Probably won't go down as fast as it's like an eighty twenty Yeah. Yep. Yep. Okay. So whenever you say asset allocation, we look at a client, let's say have three accounts. Okay.
00:04:06
Speaker
Okay. They have one account in like an IRA or like a 401k. Yep. Yep. They have another account of a Roth account. Love the Roth. Love. You love the Roth. roth It's good when you're broke. It's not good when you don't have ton money.
00:04:21
Speaker
And then the other one is a brokerage account yeah or a joint account. Okay. That would asset allocation would then do what to each one of those? Asset allocation? Yes. Well, what we would do is you would come in and we would have you take the survey and then we would figure out, okay, you're a 65 stocks, a 35 bonds, and we'll put you in a 65-35 for each of those accounts. That's right.
00:04:46
Speaker
The difference is the taxable account, we might put you in 65-35 portfolio and we'd be more tax deficient. We'd probably buy investments that are not as tax heavy just because we want to be good stewards of your money. And we want it to grow tax deficient.
00:05:04
Speaker
um So that's we look at each account and we put them up in a 65, 35 blend portfolio. Yep. thirty five blend or portfolio Okay, but asset location, game changer. Game
Asset Location Strategy Explained
00:05:16
Speaker
changer, total game changer. Okay, so let's go back to that example. And for this example, moving forward, yeah we're going to say $65,000.
00:05:23
Speaker
And then for each account, we're going to say $500,000 each. Okay. Okay. Just so you know. I like it. like it. 500K each. Yep. but Got it. Okay. So what would we normally do with the 500K each?
00:05:34
Speaker
So on a macro level, it's $1.5 million. dollars What we would normally do or what most investors would normally do is split each of those, the the you know,
00:05:46
Speaker
401k, the Roth, and the taxable account. They split each of those in a 6535. That's right. That's what- Asset allocation. That's asset allocation. Okay. Asset location. Now we're going to start kind of formulating that. And that's going to be the macro view. We're going to invest out in the portfolio as a whole. There go. We want that to be at a 6535. But the way we get to that 6535 is a little different. Can be very different. And we strategically try to get that way to that 6535. That's right. way So the the numbers doesn't change for the risk tolerance. That's right That's what's important. So whether you do it the option A or option B, it's going to be a 65-35. That's right. How we get there is different. That's exactly right.
00:06:24
Speaker
And so for the asset location, now we have to start looking at tax treatments in each account. That's right. Oh, baby. Oh, baby. Now, why would you want to look at tax differences?
00:06:34
Speaker
Why would that even matter? because Because depending on the type of account, there's certain investments that do better in certain accounts. And so equities, stocks, those are really helpful to be put inside of a Roth account because with a Roth account, we already paid the tax on it. And so we might as well invest this inside of something that historically is going to go and do really well because you don't have to ever worry about paying taxes on it again and grow faster. That's right. right Yeah.
00:07:04
Speaker
So that's that's really powerful when you start thinking about it because you're putting it into an account.
Tax Advantages of Roth Accounts vs. Traditional IRAs
00:07:09
Speaker
So let me ask you listeners, if you could have your way and you understand a little bit more about the tax treatment, would you rather have $1.5 million in Roth $1.5 million in a roth or one point five million dollars in a ah four one k or an IRA?
00:07:26
Speaker
drum roll please
00:07:29
Speaker
I think you probably want that in a Roth. That's right. And tax, people you know, you this isn't specific for everybody, but I think for the majority, wanting it in a Roth means that every time you put your hand in that to take money out, you don't get a tax bill. That's right. So your tax treatment could be zero. That's right.
00:07:48
Speaker
Yeah. Pretty powerful in retirement. Yeah. Now, if it was all in an IRA or a 401k that you moved over to an IRA, that's Every dollar you could take out of that is now taxed at ordinary income. That's right.
00:08:00
Speaker
So it's very important to understand that, especially when you get to retirement, especially for Cody and I, when we're trying to build a plan. Yeah. Because we have to try to figure out now, let's talk about what account we want to grow faster than the other ones. Yeah. And ta-da, asset location is born.
00:08:17
Speaker
That's the idea behind it. Okay. There we go. Okay. So you get to retirement and let's say that you have a $1.5 million dollars in a traditional IRA. You start pulling that money out of the traditional IRA. Say you pull out, don't know, $100,000. $100,000 is getting taxed. If you have the Roth, you pull out $100,000, none of it's getting taxed. And so the idea behind asset location is what if we put the investments that we expect to grow slower inside of the accounts that get taxed the most?
00:08:46
Speaker
Why
Optimizing Tax Efficiency with Asset Location
00:08:47
Speaker
would you ever do that? And the reason is because we have to make sure your risk tolerance for all of your money is okay, is in that asset allocation that we want. That's right. want a Yep.
00:08:59
Speaker
And the other thing about having maybe accounts that grow a little slower is required minimum distributions. That's right. What is that? The old RMDs. Yeah. So when you turn 73 75, depending on when you were The government, at some point, they want to get their hand on that money inside of your 401k, 403b, traditional IRA, any of that. The gig is up.
00:09:23
Speaker
The gig is up. They are like, we want it now. We're coming for it. We're going to get it. And so- Which doesn't sound like a big thing. But if that account is big, you guys, when the faucet gets turned on, it doesn't get turned off. Yeah. And I mean, it's not a huge deal if you need the money, but if you don't need the money, then you're just having to get taxed on it. Oh, it's a- Yeah. Yeah. It's a problem, totally, for some people.
00:09:44
Speaker
Okay, sorry. Yeah. So when it comes to your RMDs, the RMDs are calculated based on the balance of all of your IRAs, your traditional IRAs, not your Roth, your traditional IRAs. And so if we can get that traditional IRA balance to be a little bit smaller by putting, say, in our traditional IRA, all bonds...
00:10:02
Speaker
You know, if that investment historically, it's going to grow so you know slower than when they get to the RMD age, they should theoretically not have to, you know, take out as many RMDs because that balance is lower. That's right. That's really good.
00:10:15
Speaker
So in our example, let's say you have $100,000 in their IRA. Let's do That's even better. Why did I do that? in Roth. five hundred thousand dollars in ira yep five hundred thousand dollars in a joint account yep totally right on Now we are talking about asset location. Yep. So instead of asset allocation, remember with 65% equities in each account? Yep. Now we're going to say, okay let's just put 100% equities in the Roth account. yeah Because we want that baby to go... Yeah. Yeah. Because stocks, they grow more. Historically, they grow more. Historically, they grow more at 10%.
00:10:54
Speaker
And the bonds, we put 100% bonds in the IRA. Yep. So now we have a 50-50 blend. And now we're looking at that taxable account. And now we have to then split that up. Yep. And so inside of the taxable account, if we have the 500K in the Roth and stocks, we have the 500K in the traditional IRA and bonds. Then we take that taxable account of 500K. Let's say we do $475,000 that taxable account goes into stocks and then of the taxable account and goes into bonds.
00:11:26
Speaker
And if you add all of that up, what do you end up with? You have the stocks completely in the Roth. You have the bonds completely in the IRA. And if you add up the numbers, you still end up having 65-35 portfolio stocks and bonds. Yeah. And I do think that this is a training opportunity for clients because it could be fluctuate. You could see that Roth fluctuate. The Roth is going to be going up and down because it's all stocks. So you have to understand that this is kind of a different way to think. It's an uncommon perspective. sure. Totally.
00:12:03
Speaker
But I do think that at the end of the day, like we were talking about, I'd rather have more money in my Roth than my IRA. Yeah. Because in my IRAs, RMDs aren't that big. Yeah. And my Roth, I can always get at it tax free. Yeah, for sure. And I mean, you can usually expect from this, depending on the individual's tax bracket, you know, if they're in a 32% tax bracket, this is a really, really big deal. Yes. If they're in a 10% tax bracket, like it's not really that big of a deal. Right. But depending on that tax bracket, you're able to get 0.1% to 0.5% of a greater return on your investment. It's a big deal. That's a big deal. Over time. hopeful Yeah, totally.
00:12:40
Speaker
So this is something that we're trying to kind of, i would say, flex on how we're going to implement this with Uncommon Wealth Partners. yes Because not only is it it's a great strategy, but how do you actually implement this? For sure. And once we implement it, is it scalable for our clients? Yeah.
00:12:54
Speaker
And we're excited to help, but I would say the bigger account balances are, the more powerful this strategy can be. Would you agree with that? I would agree. The bigger the account balances and oftentimes the people with the bigger account balances is because they're making more money, which means that they're then in a higher tax bracket. And so that's kind of how it ends up weighing out.
00:13:10
Speaker
Yeah. So if this is interesting to you or you wanted to understand how your plan is impacted by asset location instead of asset allocation, we would love to talk to you. Yeah. Go to
Engage with Uncommon Wealth Partners
00:13:21
Speaker
our website, UncommonWealth.com. You can click on schedule time with us.
00:13:25
Speaker
We can talk through that. um If you're a current client, thanks for listening. Basically my mom and probably your mom. Yeah, and me like 100 times to get the views up. Because whenever I'm on here. That's the problem. That's how they go. That's how do I'm okay with however you got to do it. mean. Also, we haven't asked our followers to rate us for a while. You should rate us. We have like over 105. Yeah.
00:13:45
Speaker
or maybe that's too high. It's over 100. It's a lot. One of those is me. One of those me. One of those totally me. Yeah. Totally. You to do what you got to do. Yeah. But, okay, so we digress. Asset location is powerful. It's a powerful strategy. It also has its downside risks. So that's why it's helpful to just... And it's complicated. It's complicated. The biggest downside is this thing is complicated because you're no longer rebalancing your individual portfolios. You're taking a step back and rebalancing the entire thing. And so you're having to have this big view. It's more complicated. It takes more time. And if you're in a low tax bracket, it might only be 0.1%. know what mean? It's like for all that work, who knows? So, yeah. But we're happy to be on this journey with you. Thank you for listening. You've been listening Uncommon Wealth Podcast. Until next time, Cody Kowalski. See ya.
00:14:33
Speaker
That's so good. Thanks for listening. Bye.
00:14:37
Speaker
That's all for this episode brought to you by Uncommon Wealth Partners. Be sure to visit UncommonWealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.