Investors understand the importance of portfolio diversification and asset allocation. Many also take advantage of account diversification. Also called tax diversification, this allows investors to develop strategic withdrawal strategies around different accounts with different tax treatments.
But there’s another layer of diversification you need to think about. You have your asset allocation and various account types. Now how do you fill up these accounts?
Does it matter if you put the same stock exchange-traded fund (ETF) in a taxable brokerage account as opposed to a tax-deferred IRA? The answer is yes, and the difference can be substantial.
Beyond asset allocation, you also need to be aware of asset location.
What Is Asset Location?
Asset location allows you to match asset types with account types for maximum tax-efficiency and potential returns.
Let’s take a look at some common account types and which assets belong in each.
Taxable Accounts
Taxable accounts include the standard brokerage account. Dividends and interest generated in these accounts are taxed the year they are paid, and capital gains are taxed when you sell appreciated assets.
Taxable accounts may be the best home for tax-efficient or tax-friendly assets. These include long-term stocks and equity funds, such as stock index funds and stock ETFs.
These are generally growth-oriented investments. So you can potentially take advantage of the more favorable long-term capital gains tax rates, which are lower than ordinary income tax rates, when you collect your returns.
To benefit from long-term capital gains tax rates, you need to hold on to these assets for more than a year before you sell them for a profit.
Moreover, you should also place municipal bonds in taxable accounts. Municipal bond interest is generally tax-free at the federal level and sometimes at the state level.
Tax-Advantaged
These include tax-deferred and tax-free accounts.
Examples of tax-deferred accounts include traditional IRAs, 401(k)s, and 403(b)s. These accounts are funded with pre-tax dollars and investments can grow tax-deferred until you make qualified withdrawals in retirement. These distributions are taxed at ordinary income tax rates.
Tax-free accounts include Roth IRAs and Roth 401(k)s. Qualified withdrawals from these accounts are tax-free.
In general, tax-advantaged accounts may best be suited for tax-inefficient assets. These include corporate bonds and bond funds, which make regular interest payments. You should also place actively managed funds in tax-deferred accounts. These are funds that can make frequent trades in an attempt to outperform a given benchmark.
Basically, a lot is going on with these assets on a regular basis. That increases the risk of more frequent taxable events. You can benefit here by deferring taxes or by taking advantage of tax-free accounts funded with after-tax dollars.
An Example of Asset Location
We’ve gone over which accounts may be the best homes for certain assets. But why does this matter?
To answer that, let’s take a look at a simple hypothetical example.
Let’s say John falls under the 35 percent tax bracket and is 65 years old.
He has generated $60,000 in capital gains within a traditional IRA. John wants to take the entire $60,000 as a distribution. Because he’s in the 35 percent tax bracket, that leaves John with just $39,000.
But if John accumulated $60,000 in capital gains within a taxable brokerage account and sold the shares after more than a year, his capital gain tax rate would only be 15 percent. That leaves him with $51,000—a $12,000 difference.
The Bottom Line
Asset allocation and tax diversification is important, but investors sometimes overlook the importance of asset location. This is the process of strategically placing specific assets in certain types of accounts for tax efficiency and maximum return potential. You can consider placing tax-inefficient assets like bonds and bond funds in tax-advantaged accounts. Additionally, you can put more tax-efficient assets like stocks and equity ETFs in taxable accounts to potentially take advantage of lower capital gains tax rates. But your tax location strategy would ultimately depend on variables like your financial profile, tax situation, investment holding periods, and overall goals. You can come up with an asset location strategy that can meet your unique needs by working with a qualified financial and tax adviser.
The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
