An opportunity to maximize tax-favored growth in your investment account is around the corner: employee benefits season. Workplace open enrollment tends to kick in during late fall: It’s when workers sign up for the new year’s health and dental benefits. But it’s also prime time to check in on contributions to and the underlying investments in 401(k) plans, individual retirement accounts and health savings accounts, which can offer a bevy of tax benefits. Enter asset location, which involves positioning the assets with the highest growth prospects and yield for growth and tax efficiency. “That is an advanced level of planning,” said Barry Glassman, certified financial planner and founder of Glassman Wealth Services. “There’s a great opportunity at the end of the year to take a look at where things should be.” “At a minimum, I would love to see more people have the right amount of risk and growth in the right places,” added Glassman, who is also a member of CNBC’s Financial Advisor Council. “And too many people in my opinion are unlikely to touch their retirement accounts for more than a decade, and yet a lot of it is in cash or cash-like investments.” Tax diversification and asset location Investors ought to have a combination of tax-deferred, tax-free and taxable accounts, as this will help them tailor their income and manage levies paid as they draw down in retirement. Keeping the appropriate investments in the right accounts can also help enhance your after-tax return – what you get to pocket after you pay Uncle Sam. Tax-deferred accounts, like your traditional 401(k) plan and your individual retirement account, can be a great place to store assets that are generating lots of income. This would include corporate and high-yield bonds and funds holding these assets. This way, you’re capturing growth and pushing out the taxes due into the future. “We need to consider growth, but also in today’s environment – yield,” Glassman said. Tax-free accounts should be primed for growth. You use after-tax dollars to fund Roth 401(k)s and Roth IRAs, so that your investments can grow free of tax and be withdrawn free of taxes in retirement, subject to certain conditions . Invest aggressively here, said Brenna McLoughlin, senior advisor at Wealthstream Advisors. “In Roth accounts, we love a 90/10 or 100/0,” she said, referring to an allocation between stocks and bonds, respectively. “Make it aggressive to the extent that they are comfortable with the risk.” In contrast, tax-deferred retirement accounts could be split 80/20 for workers who are early to mid-career, McLoughlin said. Assets that might be good to keep in a Roth account include small-cap stocks and emerging market equities, Glassman said. Finally, taxable accounts could be a good place to hold assets like Treasury bills if you’re going to use the money soon, as well as municipal bonds. T-bills aren’t subject to state or local income taxes, but they do face federal levies. Municipal bonds are tax-exempt from federal levies, as well as state and local if the investor resides in the same locale where they were issued. Health savings accounts For workers who choose a high-deductible health plan, a triple-tax advantage awaits in the form of a health savings account. So-called HSAs allow you to put away pretax or tax-deductible dollars into an account, which can grow tax free and can be tapped free of taxes as long as you’re using the money for qualified medical expenses. The benefit of the HSA is that you can use it to cover health-care costs in the present and future – and you can take it with you even if you change employers. There is no “use it or lose it” provision. High deductible plans make the most sense for young workers with low medical expenses and employees who can cover health care expenses out of pocket (and thus minimize tapping the HSA), McLoughlin said. First make sure that you’re funding the account such that you can cover the deductible, then invest the rest, she added. What you can invest in will depend on the service provider handling your HSA, though even now money market funds available in these accounts could be paying attractive yields. “Times are different in this enrollment period, versus two years ago,” Glassman said. “I can see people dialing down the risk and saying we have a safety net that’s paying 5% that’s not taxable.”
