To minimize tax drag and optimize asset location for your investments, consider funding your accounts in the following order:

1. Employer-Sponsored Retirement Accounts (e.g., 401(k), 403(b))
   1. Reason: Contributions are often pre-tax, reducing your taxable income. Employer matching contributions are essentially free money.  You also should look at the Roth 401K option.  
      1. Tax Benefit on the Pre-Tax Deferral: Tax-deferred growth; taxes are paid upon withdrawal
      2. Tax Benefit of the Roth 401 (k) Deferral: Tax-deferred growth; taxes are paid on the deposit, not the withdrawal. 
2. Health Savings Account (HSA): (my favorite account)
   1. Reason: HSAs offer triple tax benefits: contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free.
   2. Tax Benefit: Tax-free growth and withdrawals for medical expenses
3. Individual Retirement Accounts (IRAs):
   1. Traditional IRA: Contributions may be tax-deductible, and growth is tax-deferred.
   2. Roth IRA: Contributions are made with after-tax dollars, but growth and withdrawals are tax-free.
      1. Tax Benefit: Traditional IRA offers tax-deferred growth; Roth IRA provides tax-free growth and withdrawals
4. Taxable Brokerage Accounts:
   1. Reason: Taxable accounts can be used for additional investments once tax-advantaged accounts are maximized.
   2. Tax Benefit: Capital gains and dividends are taxed, but long-term capital gains and qualified dividends are taxed at lower rates

Asset Location Strategy

This is where you should place your investments that generate returns without paying dividends or interest. 

Tax-Deferred Accounts (e.g., 401(k), Traditional IRA):

• Ideal Investments: Bonds and other income-generating assets. Interest income is taxed at ordinary income rates, so sheltering it in tax-deferred accounts can reduce the tax impact.

Tax-Exempt Accounts (e.g., Roth IRA):

• Ideal Investments: Stocks and high-growth assets. Since growth and withdrawals are tax-free, placing high-growth investments here maximizes tax benefits.

Taxable Accounts:

• Ideal Investments: Tax-efficient investments like index funds, ETFs, and municipal bonds. These investments generate lower taxable income and benefit from favorable capital gains rates.

By strategically funding and placing your investments in the proper accounts, you can optimize your portfolio for tax efficiency and maximize your after-tax returns. 

Chris graduated from the University of Maine, where he played hockey on a scholarship, and retired from professional hockey in 2007. In the community, he remains engaged, serving as a youth hockey coach. Chris holds the CERTIFIED FINANCIAL PLANNER™. Outside the office, he enjoys trying new food and wine, reading, traveling, playing golf and hockey, fat tire biking, and donating to local charities. His passions include being a husband and dad, lake life with the family, watching his son and daughter play sports, and spending time with his wife. To learn more about Chris, connect with him on LinkedIn.

Heisten Financial, LLC is a registered investment advisor with the SEC. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed.