The primary goal of asset location is to increase the tax-efficiency of your portfolio, at least it will be for most people. You want to pay the lowest amount of tax on your chosen asset allocation.
Both tax-advantaged account types benefit from tax-free growth. You pay no taxes on dividend payments and owe no taxes on capital gains when you sell assets as long as the proceeds remain in the account.
Hypothesis: International Stocks Belong in a Taxable Account
I had read somewhere that owning international stocks in a taxable account allowed you to take advantage of the Foreign Tax Credit, and that
was good enough for me.
You see, when you own non-U.S. stock funds as a U.S.-based investor, those funds pay taxes to foreign entities, and as a shareholder, you’re
indirectly paying those taxes.
Calculating the Tax-Efficiency of International Stocks
Since I keep most of money with Vanguard, I was able to choose popular index funds in the international and domestic stock categories that I
currently have or have previously held in my own accounts.
Finally, I had to determine how the dividend yield would be taxed, as tax drag will be an issue in the taxable brokerage account, but not
in a tax-advantaged account.
Based on the dividends and resulting taxes alone, the total international fund is the least tax-efficient. It spits out $2,440 in dividends,with 72% of those being qualified dividends.