Asset Location
Asset location keeps the same investments but puts each one on the right shelf: tax-heavy income in retirement accounts, tax-efficient stock in taxable accounts, the highest-growth holdings in Roth. You change nothing about risk. On a $1 million portfolio, the annual tax drag can drop by several thousand dollars.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Investors with money spread across taxable, traditional and Roth accounts.
- High earners paying the top rates plus the 3.8% net investment income tax.
- Portfolios holding both bonds and stocks in meaningful amounts.
- Households with a long horizon, where annual savings compound.
Who it's not for
- Investors with all their money in one type of account. There is nothing to relocate.
- Those who would need to sell large taxable gains to rearrange. The cost of moving can exceed the benefit.
- Investors in low brackets, where the differences are small.
How it works
Different income is taxed differently. Interest and short-term gains are ordinary income, up to 37% plus 3.8%. Qualified dividends and long-term gains are taxed at 0%, 15% or 20%, plus 3.8% for high earners.
Traditional IRAs and 401(k)s defer tax, but everything comes out as ordinary income. Roth accounts let qualified withdrawals come out tax-free. Taxable accounts give lower rates on long-term gains and a stepped-up basis at death.
So the general order: bonds and high-turnover funds in traditional accounts, where their ordinary income is sheltered. Broad stock index funds in taxable accounts, where dividends get lower rates and losses can be harvested. The holdings with the highest expected growth in Roth, where growth is never taxed.
Foreign stock funds often belong in taxable accounts, because the foreign tax credit is only usable there.
Think of the portfolio as one. Each account holds what it holds best, and the total mix stays at your target.
Illustrative example
Illustrative: a married couple above the NIIT threshold in the 35% bracket has $500,000 in a taxable account and $500,000 in traditional IRAs. Target mix: half bonds, half stocks. Bonds yield 5% interest; stocks yield 1.5% in qualified dividends.
- Before: bonds in taxable. Interest $500,000 x 5% = $25,000, taxed at 38.8%: $9,700 a year.
- After: stocks in taxable. Dividends $500,000 x 1.5% = $7,500, taxed at 23.8%: $1,785 a year.
- Bonds move to the IRAs, where interest is not currently taxed.
- Annual reduction in tax: $9,700 - $1,785 = $7,915.
About $7,915 a year stays invested, with the same 50/50 mix and the same risk.
The rules
| Rule | Citation |
|---|---|
| Qualified dividends and net capital gain are taxed at 0%, 15% or 20%. | IRC §1(h) |
| Net investment income above the MAGI threshold carries a 3.8% tax. | IRC §1411 |
| Traditional IRA distributions are taxed as ordinary income. | IRC §408(d)(1) |
| Qualified Roth IRA distributions are not included in income. | IRC §408A(d)(1) |
| Inherited property generally takes a basis equal to fair market value at death. | IRC §1014 |
Watch-outs
- Rearranging inside the taxable account can trigger gains. Use new money, dividends and IRA trades first.
- Growth placed in traditional accounts becomes ordinary income later. Over long periods, results depend on returns and future rates.
- Holding all bonds in IRAs can make rebalancing harder in a downturn. Plan it.
- Required minimum distributions start at 73 (75 for those born 1960 or later) and are sized by the traditional balance.
What we do
We map every account, compute your current annual tax drag, and show the after-tax difference of a relocated portfolio. Your investment advisor selects and trades the holdings; we provide the tax numbers and check them on the return.
Questions
Does asset location change my risk?
No. The overall mix stays the same. Only which account holds which asset changes.
Should bonds always go in the IRA?
Usually, for taxable bonds. Municipal bonds belong in taxable accounts, since their interest is already tax-free.
How often should this be reviewed?
Each year, and whenever you add a new account, change advisors, or near retirement.