Why Asset Location Matters Just as Much as Asset Allocation

Introduction

Most investors understand the importance of asset allocation - how you divide your portfolio between stocks, bonds, and other assets. But far fewer consider asset location - which accounts hold which investments.

Getting asset location right can:

• Boost after-tax returns by 1% or more annually
• Reduce unnecessary tax bills
• Help your money last longer in retirement

In this guide, we'll explain:

• The key differences between asset allocation and location
• How proper asset location saves taxes
• Where to hold different investment types (stocks, bonds, REITs, etc.)
• Common asset location mistakes to avoid

1. Asset Allocation vs. Asset Location

Asset Allocation Answers "What to Own"

This determines your portfolio's risk/return profile:

• 60% stocks / 30% bonds / 10% alternatives
• More stocks = higher growth potential but more volatility

Asset Location Answers "Where to Own It"

This optimizes for tax efficiency by placing:

• Tax-inefficient assets in retirement accounts
• Tax-efficient assets in taxable accounts

Example: Two investors with identical 60/40 portfolios could have very different after-tax results based solely on asset location.

2. The Tax Efficiency Spectrum

Not all investments are taxed equally. Here's how common assets rank from least to most tax-efficient:

Why This Matters:

• Placing REITs in a taxable account could mean 35%+ in annual taxes on distributions
• The same REIT in an IRA grows tax-deferred

3. Optimal Asset Location Strategy

Best for Taxable Accounts:

• Broad market index funds/ETFs (Low turnover, qualified dividends)
• Municipal bonds (Tax-free interest)
• Tax-managed funds (Engineered for low taxes)

Best for Tax-Deferred Accounts (401k/IRA):

• REITs (High ordinary income distributions)
• High-yield bonds (Interest taxed as income)
• Active funds (Frequent capital gains)

Best for Roth Accounts:

• Assets with highest growth potential (Tax-free withdrawals)
• Small-cap/value stocks (Higher expected returns)

4. Real-World Example

Investor A (Poor Location)

• Taxable: REITs, High-Yield Bonds
• IRA: Index Funds
  Result: High annual tax bills reduce compounding

Investor B (Optimal Location)

• Taxable: Index ETFs, Munis
• IRA: REITs, Active Funds
  Result: More money compounds tax-efficiently

Over 30 years, Investor B could have 10-20% more after-tax wealth despite identical allocations.

5. Advanced Asset Location Tactics

Tax-Loss Harvesting Pairs

Hold similar (but not identical) funds in taxable vs. retirement accounts to enable tax-loss harvesting without wash sales.

Bond Location in Retirement

During retirement, consider holding bonds in IRAs rather than taxable accounts to:

• Reduce RMDs (by slowing IRA growth)
• Keep taxable account withdrawals at lower capital gains rates

International Stock Considerations

Foreign tax credits may make international stocks slightly more tax-efficient in taxable accounts vs. retirement accounts.

6. Common Asset Location Mistakes

❌ Putting REITs or high-yield bonds in taxable accounts
❌ Holding tax-efficient index funds in Roth IRAs (wastes tax-free growth)
❌ Ignoring RMD implications of asset location
❌ Overcomplicating with too many accounts

7. How to Implement This Strategy

1. List all investment accounts (taxable, 401k, IRA, Roth, HSA)
2. Categorize investments by tax efficiency
3. Assign least efficient assets to retirement accounts
4. Review annually (especially after major market moves)

Conclusion: Small Changes, Big Impact

Proper asset location won't change your investment returns, but it can significantly improve after-tax outcomes. Combined with smart asset allocation, it's one of the most effective ways to:

✔ Keep more of your investment gains
✔ Reduce lifetime tax burdens
✔ Make your savings last longer

Need help optimizing your asset location? Schedule a consultation for a personalized review.  Schedule a call.

Disclosures

This material is for informational purposes only and not tax advice. Consult your tax advisor regarding your specific situation. Asset location does not eliminate market risk. Past performance does not guarantee future results.