Tax‑Efficient Asset Location Explained
Discover how strategic asset location can improve your portfolio’s tax efficiency and overall returns, with guidance from Ron McCoy.
Asset location is a key—yet often overlooked—part of investment planning. For high-net-worth individuals, where you hold your investments can be just as important as what you own. Placing assets in the right types of accounts can boost after-tax returns without increasing your risk.
What Is Asset Location?
Asset location is about distributing investments across taxable, tax-deferred, and tax-free accounts for maximum tax efficiency. While asset allocation covers which investments you own, asset location decides where to hold each type for the best after-tax results.
Source: Morningstar – Asset Location: The Overlooked Tax Strategy
Why Asset Location Matters
Proper asset location can:
- Improve net returns by 0.5%–0.75% per year (Morningstar, 2023)
- Reduce tax drag on growth assets
- Make the most of tax-advantaged accounts for income-producing investments
Case Study: Boosting Returns by 0.6% Annually
A physician with $3 million spread across a taxable brokerage, a 401(k), and a Roth IRA improved her results by placing municipal bonds in her taxable account, equities in her 401(k), and high-growth stocks in her Roth. Over 10 years, her after-tax returns increased by nearly 6%—with no change to her investment mix.
Best Practices for Asset Location
- Use taxable accounts for tax-efficient assets. Municipal bonds, index funds, and ETFs are good choices here because of their low tax impact.
- Keep tax-inefficient assets in tax-deferred accounts. Place high-turnover funds, REITs, and taxable bonds in IRAs or 401(k)s to delay taxes until withdrawal.
- Put growth assets in tax-free accounts. Small-cap and high-growth stocks work well in Roth IRAs to maximize tax-free growth.
Actionable Tips for Investors
- Review your setup every year: Tax laws and account rules can change—adjust as needed.
- Watch contribution limits: Know the IRS caps for IRAs, 401(k)s, and Roth accounts to avoid penalties.
- Coordinate with your CPA: Align your asset location with your tax plan for the best outcome.
Expert Perspective
Strategic asset location complements your overall investment plan. By optimizing for taxes at every stage, you give your wealth a better chance to grow and last.
