Which statement best describes an example of asset location strategy?

• A. Placing high-growth equities in taxable accounts to capture lower taxes on capital gains.
• B. Keeping all investments in a single account regardless of tax treatment.
• C. Locating investments in accounts with favorable tax treatment, such as keeping tax-inefficient investments in tax-advantaged accounts to optimize after-tax returns.
• D. Moving investments to foreign accounts to dodge domestic taxes.

Answer: (C)

Asset location strategy is about reducing taxes by placing investments in the types of accounts that minimize tax drag. The best description is locating investments in accounts with favorable tax treatment, such as keeping tax-inefficient investments in tax-advantaged accounts to optimize after-tax returns. By putting assets that generate a lot of taxable income or frequent tax events into tax-advantaged spaces (like traditional IRAs or 401(k)s, where taxes are deferred, or Roth accounts, where withdrawals can be tax-free), you reduce when and how much tax you pay and let more of the gains stay invested.

Putting high-growth equities in taxable accounts with the idea of “lower taxes on capital gains” isn’t reliable, because taxes on gains depend on selling and holding periods, and frequent selling or dividends can still create tax drag. Keeping everything in one account ignores the tax benefits you could gain from proper placement. Moving investments to foreign accounts to dodge taxes is not legitimate and overlooks legal tax rules.