Buy Location Optimization gives you the flexibility to specify which securities are placed in specific account types. This logic is based on the idea that (from a taxable standpoint) there are 3 different account types: Taxable, Non-Taxable (Roth-IRAs), and Tax-Deferred. When activated, Oranj will attempt to place the specified securities in the specified account types according to their rankings (explained below in the Buy Location Optimization Logic section).
To activate this feature, click on Admin and then Trade Settings. In the Trading section, click the toggle next to Buy Location Optimization to On. Once activated, when you create or edit a model, you will see the rank columns for Roth IRA, Tax-Deferred, and Taxable. If this feature is not activated, Buy Location Optimization to a household portfolio rebalance.
Rank The Securities
The rankings are meant to work vertically, rather than horizontally. The idea is, to begin with, your desired Non-Taxable (Roth IRA) rankings, being careful to give credence to the securities you want to be purchased in the Roth accounts. The lower the number the higher the ”ranking”; for example, if you rank two securities as “1” and one security as “2” (as shown in the example below), then Oranj will treat the securities ranked as number 1 as the highest priority to place in the Roth accounts. However; since both securities have the same ranking, then other Oranj logic (such as the trade that will best ”fit” in the account) will help determine which security is purchased first. With that in mind, make sure you are comfortable with any securities with the same number ranking in the Roth column being considered equally ranked securities, which allows Oranj to choose which security, out of the equally ranked securities, to be purchased first.
Next; move onto the Tax-Deferred column and follow the same logic as the Roth column (as covered above).
Again, making sure that you are comfortable with any securities with the same number ranking in the Tax-Deferred column being considered equally ranked securities (again, allowing Oranj to determine which security to purchase first).
Then move onto the Taxable column and repeat the same steps listed above.
While there is no “limit” on the number of securities that may be ranked, Oranj recommends that you use this setting sparingly (in this case, less really is more). Keep in mind that Oranj will try to fulfill all your ranking requests in the Roth column before moving onto the tax-deferred column, and then will try to fulfill all the rankings in the tax-deferred column before moving onto the taxable column. This means that the more trades Oranj is ”forced” to attempt to place in certain accounts, the more likely it will be for leftover trades to be split (creating more trades in the process). Once the ranking logic is complete, the default trading logic will take over.
Buy Location Optimization Logic
If you have securities ranked, Oranj will attempt to purchase those securities in their ranking order if:
- The security has a “buy” trade during the rebalancing process.
- The household portfolio you are rebalancing has that particular account type.
- There is available cash in that account type.
When the above criteria are met, the Buy Location Optimization feature will attempt to place the buys in the order outlined in the previous example. When either the rankings are satisfied, or the account types in question run out of cash, then Oranj moves onto the next account type column.
By placing order begins in the Roth IRA column, then moves onto the Tax-Deferred Column, and then moves onto the Taxable column.
Oranj will split trades to try and force as much as it can into the selected account type. For instance, suppose you had a ranking of 1 on TWITX in the Roth IRA ranking, and suppose further that Oranj needs to purchase $25,000, but there is only $10,000 of available cash in the Roth IRA. In this scenario, the program will purchase the $10,000 in the Roth IRA that it can, and the remaining $15,000 trade would be purchased in another account type.
This example illustrates why you may want to consider ranking securities in the Roth IRA column as well as the Tax-Deferred column. That way if Oranj cannot purchase all of one security in the Roth accounts, then at least it can attempt to purchase those securities in the Tax-Deferred accounts.
Other settings (such as the security restriction to not purchase certain securities in taxable accounts, or trade minimum settings) will still be honored, so keep that in mind as you use this feature.