When investors talk about building a portfolio, the conversation usually starts with asset allocation: how much goes into stocks, bonds, and cash. What often gets overlooked is where those investments live.
That decision matters more than many people realize.
What Is Asset Location?
Asset location is the strategy of placing different types of investments into specific account types to help minimize taxes and improve after-tax results over time. It is not about changing what you invest in. It is about being intentional with where those investments are held.
When done thoughtfully, asset location can quietly support long-term wealth growth without requiring additional risk.
Most investors hold money across multiple account types, such as:
- Taxable brokerage accounts
- Tax-deferred accounts like 401(k)s and traditional IRAs
- Tax-free accounts like Roth IRAs, Roth 401(k)s, and Health Savings Accounts
Each of these account types is taxed differently. Asset location takes advantage of those differences by pairing investments with the accounts that tend to treat them most favorably from a tax perspective.
While asset diversification focuses on spreading risk, asset location focuses on managing tax exposure. Both matter, and they work best when considered together.
General Asset Location Guidelines
These are not hard rules, but they can provide a helpful framework.
Taxable Accounts (Brokerage Accounts)
These accounts are often best suited for investments that are more tax-efficient, including:
- Passive index funds
- Long-term stock holdings
- Tax-free municipal bonds
These investments typically generate fewer taxable events or benefit from lower long-term capital gains rates. Taxable accounts also allow for tax-loss harvesting, which can help offset capital gains tax in certain years. Learn more about taxable brokerage accounts and tax-loss harvesting in our article Tax-Wise Investing in Your Regular Taxable Brokerage Account.
Tax-Deferred Accounts (401(k)s and Traditional IRAs)
Because these accounts generate no tax liabilities until withdrawal later in life, they are appropriate for investments with higher ongoing income, such as:
- Taxable bonds
- Real estate investment trusts
- Actively managed mutual funds
Holding these investments in tax-deferred accounts can help reduce the annual tax impact while allowing them to compound over time.
Tax-Free Accounts (Roth IRAs, Roth 401(k)s, HSAs)
These accounts are often reserved for investments with higher growth potential since most Roth owners are advised to defer withdrawing from these accounts as long as possible. Common examples include:
- Growth-oriented stocks
- Emerging market funds
- Long-term equity strategies
When growth occurs in a tax-free environment, the long-term benefit can be meaningful.
Our recent article on Understanding Roth Conversions can help illuminate when these accounts might make sense, and why they’re worth considering.
Why Asset Location Works
The effectiveness of asset location comes down to understanding how different investments and account types interact.
Tax-Deferred vs. Tax-Free Accounts
Tax-deferred accounts may offer a deduction today but require taxes to be paid later. Tax-free accounts do not provide an upfront deduction, but qualified withdrawals are not taxed at all. Where future growth occurs can significantly affect after-tax outcomes.
Tax-Efficient vs. Tax-Inefficient Investments
Index funds and many stocks tend to produce fewer taxable distributions each year. Bonds and actively managed funds often distribute interest or short-term gains that are taxed annually. Matching these characteristics to the right account type helps reduce unnecessary tax friction.
According to the IRS, ordinary income is generally taxed at higher rates than long-term capital gains, which reinforces why placement matters. You can review current tax rate structures directly on the IRS website at irs.gov.
The Long-Term Benefit
Asset location is not about chasing short-term savings; it is about reducing ongoing tax drag over time.
When taxes quietly take less from a portfolio each year, more capital remains invested and continues compounding. Over long periods, that difference can add up.
A Thoughtful, Personalized Approach
Asset location strategies depend on each investor’s unique situation. Account types, income levels, time horizons, and future tax considerations all play a role. That is why broad guidelines are a starting point, not a one-size-fits-all solution.
If you are curious how asset location fits into your overall investment strategy, we welcome the opportunity to talk. You can start a conversation with our team by reaching out through our contact page.
Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.
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