Most investors spend considerable time thinking about what to own — which stocks, bonds, funds, or other assets belong in their portfolio. Far fewer think about where those investments live. That distinction turns out to matter more than many people realize.
Asset location is the practice of strategically placing investments across different account types such as taxable brokerage accounts, tax-deferred accounts like traditional IRAs and 401(k)s, and tax-exempt accounts like Roth IRAs, to reduce the drag that taxes place on long-term returns. It does not change what you own or how much risk you take. It simply asks: given the tax treatment of this investment, which type of account is the best home for it?¹
Why Account Type Changes the Math
Different accounts are taxed in fundamentally different ways. Taxable brokerage accounts generate tax bills each year on dividends, interest, and realized gains. Tax-deferred accounts — traditional IRAs and 401(k)s — allow investments to grow without annual taxation, but withdrawals are taxed as ordinary income. Tax-exempt accounts like Roth IRAs grow tax-free and are not subject to required minimum distributions during the account owner’s lifetime.²
Because of these differences, the same investment can produce meaningfully different after-tax results depending on where it is held. A bond fund generating regular interest payments, for example, is taxed at ordinary income rates each year if held in a taxable account. Held inside a traditional IRA, those payments compound without annual taxation. The difference over time can be substantial.³
A Framework for Thinking About Placement
A general rule of thumb, refined by individual circumstance, goes like this:
Tax-inefficient investments — those that generate significant taxable income each year, such as taxable bonds, high-yield bond funds, real estate investment trusts (REITs), and actively managed funds with high turnover — are generally better suited to tax-deferred or tax-exempt accounts, where their distributions are sheltered from annual taxation.⁴
Tax-efficient investments — broad stock index funds, ETFs, and investments that generate primarily long-term capital gains or qualified dividends taxed at lower rates — are generally better suited to taxable accounts, where their tax advantages can be preserved.⁵
High-growth assets with significant appreciation potential are often well-placed in Roth accounts, where that growth will never be subject to income tax or future RMDs.⁶
The Cost of Not Thinking About Location
Research suggests that an optimized asset location strategy can improve annual after-tax returns by a meaningful margin — estimates from Schwab indicate the benefit ranges from approximately 0.14 to 0.41 percentage points per year for investors in higher tax brackets.⁷ For a retiree with a multi-million dollar portfolio, that gap can translate to tens of thousands of dollars in additional spendable wealth over time.
The hidden cost is that many investors implement a single asset allocation uniformly across all their accounts, holding identical proportions of stocks and bonds in taxable and tax-advantaged accounts alike. While simple and consistent, this approach leaves tax efficiency on the table.
This Is Worth a Conversation
Asset location is not a set-it-and-forget-it exercise. Tax laws change. Account balances shift. New contributions and withdrawals alter the picture. And implementing changes in taxable accounts requires care, since selling misplaced investments can itself trigger a tax event. The right approach is to make changes gradually and strategically, a process that benefits from coordination between an investor and your Wedbush financial advisor.⁸
March is a natural time to revisit this. With last year’s tax information fresh and the year’s planning horizon still open, a conversation with your Wedbush financial advisor about whether your investments are located as efficiently as possible can be a meaningful and timely use of the season.
Bottom Line: Getting the right investments into the right accounts is one of the clearest ways to improve after-tax wealth without taking on additional risk or changing your overall strategy. If you have never reviewed your portfolio through an asset location lens, now is a good time to start.
Sources:
[1] https://www.fidelity.com/learning-center/wealth-management-insights/asset-location-minimize-taxes
[2] https://www.schwab.com/learn/story/how-asset-location-can-help-save-on-taxes
[3] https://www.morningstar.com/personal-finance/asset-location-tax-aware-investment-strategy
[4] https://www.schwab.com/learn/story/how-asset-location-can-help-save-on-taxes
[7] https://www.schwab.com/learn/story/how-asset-location-can-help-save-on-taxes
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