Introduction
Asset location is the practice of matching investments to the account type where they will produce the most favorable after‑tax outcome. It complements asset allocation (how much to hold in stocks, bonds, and cash) by deciding where those assets should sit: in a taxable brokerage account, a tax‑deferred account (like a traditional IRA or 401(k)), or a tax‑exempt account (like a Roth IRA). Done well, asset location can meaningfully boost a portfolio’s after‑tax returns without changing its risk profile.
Why it matters now
Taxes are one of the few guaranteed long‑term drags on investment returns. Two portfolios with identical pre‑tax returns can end up with very different after‑tax wealth depending on where assets are held. In my practice as a CFP® professional, I routinely see retirees and pre‑retirees increase their effective after‑tax return by several tenths of a percent annually simply by relocating a few asset classes to more tax‑advantageous accounts. Over decades, that difference compounds.
Key account types and their tax features
- Taxable brokerage accounts: Investment income (dividends, interest) and realized capital gains are taxed in the year they are recognized. Long‑term capital gains and qualified dividends receive preferential rates relative to ordinary income for most taxpayers (see IRS guidance on capital gains and dividends: https://www.irs.gov/taxtopics/tc409).
- Tax‑deferred accounts (traditional IRAs, 401(k)s): Contributions and earnings grow tax deferred. Withdrawals are taxed as ordinary income when taken in retirement; penalties may apply for early distributions. Required minimum distribution rules can force taxable withdrawals from these accounts (IRS RMD guidance: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions).
- Tax‑exempt accounts (Roth IRAs and Roth 401(k)s; municipal bonds in taxable accounts): Qualified withdrawals from Roth accounts are tax‑free. Municipal bond interest can be federally tax‑exempt when held in taxable accounts (Consumer Financial Protection Bureau overview: https://www.consumerfinance.gov/).
