Most investors are familiar with strategies like asset allocation, portfolio diversification and rebalancing to help manage risk and improve returns. A lesser-known and equally important tactic – asset location – focuses on boosting your after-tax returns by placing investments in the most tax-efficient accounts. When done well, asset location can lower the taxes you pay over time, enhancing your portfolio’s long-term growth.
Quick facts:
- Not all account types are taxed the same way, and not all types of investment income have the same tax treatment.
- Asset location matches tax-efficient investments with taxable accounts and tax-inefficient investments with tax-advantaged accounts.
- An effective asset location strategy (also called a tax location strategy) can improve the overall tax efficiency of your investments.
- Asset location is a key component of retirement account tax strategies.
Understanding asset location
Brokerage accounts, individual retirement accounts (IRAs) and other types of accounts are subject to different tax rules.
Likewise, different types of investments generate income that’s subject to unique tax treatment. The goal of asset location is to maximize after-tax returns by placing investments in the types of accounts that offer the best tax advantages.
Here’s an overview of the three main types of investing accounts:
- Taxable accounts: These are regular brokerage accounts with no special tax advantages. You can buy and sell investments freely without age restrictions or withdrawal rules. But you pay taxes when you earn dividends or interest income, or when you realize capital gains.
- Tax-deferred accounts: These accounts – including traditional IRAs, 401(k)s and thrift savings plans (TSPs) – let you delay your tax bill until a future date. Your contributions and earnings grow tax-deferred, and you pay taxes on withdrawals in retirement (ideally, when you’re in a lower tax bracket).
- Tax-exempt accounts: Roth IRAs, Roth 401(k)s and health savings accounts (HSAs) fall into this category. You contribute after-tax dollars, so there’s no upfront tax break. But your investments grow tax-free, and qualified withdrawals are also tax-free, which can hugely beneficial in retirement.
Generally, the more tax-efficient an investment is, the more suitable it is for taxable accounts. Likewise, the less tax-efficient an investment is, the more suitable it is for tax-advantaged accounts.
It’s worth noting that asset location isn’t the same as its similar-sounding cousin “asset allocation.” While asset location seeks to maximize after-tax returns and enhance your overall after-tax portfolio management, asset allocation manages risk by diversifying across and within asset classes. Ultimately, asset allocation is about what you invest in, while asset location focuses on where you keep those investments to increase after-tax returns. Together, they form a more robust investment strategy than either could achieve alone.
Why asset location matters
Tax drag is the ongoing negative impact of taxes on your overall investment returns. It’s calculated as the difference between an investment’s return before and after taxes.
Taxes, of course, can slowly eat away at your gains, making it harder for your money to grow over time. Tax-efficient investing (i.e., placing investments in the most suitable accounts) helps reduce this drag.
Investors can use tax-efficient investing today and in retirement. Asset location can help you realize immediate tax savings and the money you save on taxes stays invested and compounds over time. This win-win can help improve your after-tax wealth accumulation – and supercharge your nest egg.
Understanding how dividends, interest and capital gains are taxed is key to asset location. Here’s a quick review:
| Type of investment income | Tax treatment |
| Interest | Taxed as ordinary income (up to 37%)1 |
| Qualified dividends | Taxed at long-term capital gains rates (0%, 15% or 20%) |
| Non-qualified dividends | Taxed as ordinary income (up to 37%)2 |
| Short-term capital gains | Taxed as ordinary income (up to 37%) |
| Long-term capital gains | Taxed at preferential rates (0%, 15% or 20%)3 |
Asset location strategies for different accounts
It would be great to put all your investments into tax-advantaged accounts, but annual contribution limits and income restrictions prevent you from doing so. Therefore, you’ll need to pick the best place to keep your investments.
Not everyone will use the same asset location strategy because the most effective approach depends on your specific financial situation, tax profile and investment goals. Still, here are general guidelines for asset location:
Best investments for taxable accounts
Taxable accounts are best for tax-efficient investments, such as:
- Equity index funds and exchange-traded funds (ETFs) other than real estate investment trusts (REITs)
- Equity securities held long-term for growth
- Tax-free municipal bonds and municipal mutual funds
- Tax-managed funds
- Low-turnover mutual funds
Best investments for tax-deferred accounts
Tax-deferred accounts are best suited for tax-inefficient investments – those that generate income taxed at higher rates, or that produce frequent taxable events, such as:
- Taxable bonds and bond funds
- REITs
- Actively managed (high turnover) funds
- High-yield dividend stocks and funds
- Commodities
Best investments for tax-exempt accounts
Tax-free accounts are ideal for investments with high growth potential or those that generate taxable income, such as:
- Growth-oriented investments (small-cap stocks, high-growth equities)
- Actively managed funds
- REITs
- High-yield bonds and bond funds
- Alternative investments with higher risk-reward potential
Asset location in retirement planning
Asset location plays a key role in retirement planning. Having a variety of taxable, tax-deferred and tax-exempt accounts gives you more control over your retirement income.
Withdrawal strategies for tax efficiency
How and when you withdraw from various accounts in retirement impacts your taxes. A traditional approach is to take money from taxable accounts first, then tax-deferred accounts (like traditional IRAs) while saving Roth accounts for last, allowing your tax-advantaged accounts to grow longer.
Another approach is to withdraw from all your accounts based on each account’s percentage of your overall savings. The benefit of this “proportional” approach is that it spreads out the tax impact, providing a more stable tax bill and potentially lowering taxes over the long run.
Managing tax brackets with asset location
If you have a lot of money saved in tax-deferred retirement accounts, required minimum distributions (RMDs) could push you into a higher tax bracket, especially when that income is combined with income from Social Security benefits, dividends or capital gains.
One option for reducing RMDs (and the risk of entering a higher tax bracket) is to start taking withdrawals at age 59 ½ – the earliest opportunity to avoid early withdrawal penalties. (An added benefit is that the “early” RMD income may let you defer claiming Social Security benefits, allowing you to lock in a larger monthly benefit in the future.)
Another strategy is to implement a Roth conversion, which rolls funds from a pre-tax retirement account into a Roth account that is exempt from RMDs while the account owner is alive. That means you can leave the account alone if you don’t need the money, making Roths a powerful wealth-transfer vehicle.4
Using tax-efficient withdrawal strategies – such as starting with taxable accounts, then moving to tax-deferred and saving Roth accounts for later – you can keep your income in a lower tax bracket and let your tax-advantaged accounts continue to grow.
You can also manage your taxes by making strategic asset sales. For example, you might sell long-term investments in years when your income is lower to take advantage of reduced capital gains rates. Spacing out these sales or pairing them with deductions (e.g., charitable contributions) can help lower your taxable income and avoid higher Medicare premiums.5
Asset location pitfalls to avoid
A common asset location mistake is placing the wrong investments in the wrong types of accounts. For example, holding tax-inefficient assets like bonds or REITs in a taxable account can lead to higher yearly tax bills. Likewise, putting tax-efficient investments like index funds in a tax-deferred account can waste the opportunity to benefit from lower capital gains rates. These missteps can reduce your after-tax returns and make your portfolio less efficient over time.
Another pitfall to watch out for is overlooking the long-term tax impact when building your portfolio. It’s easy to focus on asset allocation and forget about asset location, but ignoring where you hold your investments can cost you in the long run.
It’s also important to consider rebalancing your portfolio. Failing to rebalance with tax efficiency in mind – especially in taxable accounts – can trigger avoidable capital gains. Instead, consider using new contributions, dividends or tax-loss harvesting to stay on track without creating a big tax bill. One other mistake worth mentioning is ignoring the future tax impact of RMDs. Loading too much money into tax-deferred accounts can lead to large RMDs in retirement, which can push you into a higher tax bracket and increase your future tax burden.
Working with financial professionals
Tax-aware investment management can help you keep more of what you earn by reducing the impact of taxes on your portfolio. Placing the right investments in the right types of accounts can help lower your tax bill and improve your after-tax returns.
If you don’t have the time, expertise or inclination to establish an asset location strategy on your own, consider working with a financial advisor who can help you build a tax-efficient portfolio that fits your goals and adjusts as your needs change. They can also help you combine asset location with estate planning, so you pass on your wealth in a tax-smart way, like leaving Roth accounts to the next generation or choosing the most efficient assets to transfer.
Bottom line
Asset location often flies under the radar, but it’s a powerful tax-minimization strategy that can boost your after-tax returns. You’ll generally benefit more from asset location if you’re in a high tax bracket, as you’re more likely to feel the impact of tax drag. You’ll also benefit if you expect to pay a lower marginal income tax rate in retirement. With a robust asset location and asset allocation strategy, you can grow your money, enjoy it in retirement and leave a legacy to your loved ones with less lost to taxes.
Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054. Tel. 973-285-3600). Neither Summit Financial nor Conway Wealth Group provide tax or legal advice. 7833862.1
- Internal Revenue Service, “IRS Releases Tax Inflation Adjustments for Tax Year 2025.” (October 2024) ↩︎
- Internal Revenue Service, “Topic no. 404, Dividends.” (November 2024) ↩︎
- Internal Revenue Service, “Topic no. 409, Capital Gains and Losses.” (January 2025) ↩︎
- Internal Revenue Service, “Retirement Topics – Required Minimum Distributions (RMDs). (December 2024) ↩︎
- Social Security Administration. “Premiums: Rules for Higher-Income Beneficiaries.” (2025) ↩︎
