Asset Location: Where You Invest Matters

However, another important part of portfolio construction often receives less attention: asset location, which refers to where investments are held. The same investment may produce a different after-tax result depending on where it is held. In other words, asset allocation focuses on what you own, while asset location focuses on where you hold it.

How Different Accounts Are Taxed

Different accounts receive different tax treatments. In a taxable brokerage account, interest, dividends, and realized capital gains may create a current tax obligation. Traditional retirement accounts, such as IRAs and 401(k)s, generally allow investments to grow tax-deferred, but withdrawals are typically taxed as ordinary income. Roth accounts are funded with after-tax dollars, and qualified withdrawals may be tax-free.

Because each account is taxed differently, the placement of investments can affect how much of a portfolio’s return is ultimately available to support future goals. Two investors could own the same investments and still experience different after-tax outcomes based on where those investments are held.

Where Different Investments May Fit

Some investments are generally considered more tax-efficient than others. Broad-market index funds and exchange-traded funds often generate relatively low turnover. When held for longer periods, much of their return may come from price appreciation and qualified dividends, which may receive more favorable tax treatment than ordinary income.

These characteristics can make certain stock funds reasonable candidates for taxable accounts.

Other investments may regularly produce income or gains that are taxed less favorably or create a more frequent tax obligation, such as taxable bonds, high-yield bonds, real estate investment trusts, and strategies with higher portfolio turnover. Holding these investments in a tax-deferred account may help reduce the yearly tax impact because the income is generally not taxed until it is withdrawn. However, these are not strict rules, and the most appropriate location depends on the investor’s full financial situation.

The Role of Roth Accounts

Roth accounts can be especially valuable because qualified Roth withdrawals generally are not included in taxable income. For this reason, investors sometimes place assets with greater expected long-term growth in Roth accounts, where qualified earnings and withdrawals may benefit from tax-free treatment.

However, this does not mean every Roth account should automatically hold the most aggressive investments available. Risk tolerance, time horizon, liquidity needs, and the overall portfolio still matter. Also, a Roth account should not be managed in isolation, but rather it should support the household’s broader goals and overall investment strategy.

Looking Across the Entire Household

Asset location is often most effective when all household accounts are viewed together. A family may have several types of accounts, including:

• Workplace retirement plans
• Traditional IRAs
• Roth IRAs
• Joint or individual brokerage accounts
• Health savings accounts
• Trust accounts

Each account does not need to hold the same combination of stocks and bonds. For example, a household might hold more taxable bonds in a traditional IRA while placing tax-efficient stock funds in a brokerage account. The individual accounts may look different, but the household’s overall investment mix can remain the same.

Rebalancing and Tax Management

Asset location may also make portfolio rebalancing, involving buying and selling investments to bring a portfolio back toward its intended allocation, more efficient.

Inside a retirement account, these transactions generally do not create an immediate taxable capital gain. In a taxable account, selling an appreciated investment may create a taxable gain. As a result, it may sometimes be more efficient to complete part of the rebalancing process inside retirement accounts.

Taxable accounts can also provide additional planning opportunities, including tax-loss harvesting, gifting appreciated securities to charity, and strategically realizing gains during lower-income years. These decisions should be coordinated carefully. A transaction that makes sense from an investment perspective may also have broader tax consequences.

Retirement Planning

Asset location remains important after retirement begins. During retirement, asset location may affect withdrawal decisions, required minimum distributions, Roth conversions, Medicare premiums, Social Security taxation, and the assets eventually transferred to heirs.

For example, pre-tax retirement accounts that represent an outsized part of household savings may unnecessarily increase tax rates in the future due to required minimum distribution growth outpacing household income needs.

By contrast, Roth assets may provide more flexibility because qualified withdrawals generally do not increase taxable income.

Taxable accounts may also offer flexibility because investors can control when gains are realized. Appreciated securities may be used for charitable gifts, and certain inherited investments may receive a step-up in cost basis under current tax law.

These considerations show why asset location should not be viewed as a one-time investment decision. It should be reviewed as tax laws, account values, goals, and income needs change.

Why Asset Location Is Not One-Size-Fits-All

Asset location can be useful, but it is not always as simple as placing all bonds in retirement accounts and all stocks in a taxable account. The appropriate strategy may depend on:

• Current and future tax rates
• Investment returns and risk
• Retirement and withdrawal needs
• Charitable and estate-planning goals
• Liquidity and available account types

There may also be tradeoffs.

Placing taxable bonds in a traditional IRA may shelter their interest from current taxation. However, it may also leave a larger share of higher-growth assets in taxable accounts, where future appreciation could eventually create capital-gains taxes.

Similarly, placing high-growth investments in Roth accounts may increase the value of tax-free growth, but it may also create more volatility in an account that could be especially valuable later in retirement.

Asset location adds another layer to the planning process that may improve after-tax outcomes over time, in coordination with overall diversification, appropriate risk management, and thoughtful investment selection.

This article is part of an ongoing series aimed to help build overall financial literacy and was authored by Grimes & Company’s 2026 Intern Carter Richardson. While not a comprehensive deep dive into every single topic, it is designed to provide a helpful overview to key topics within the world of investing and financial planning. Please reach out to connect with an advisor or expert on the subject to learn more and start planning for your financial future.