Tax season may come once a year, but the impact of taxes continues year‑round, especially for families focused on building long‑term, after‑tax wealth.
Left unmanaged, taxes can quietly erode returns over time. A thoughtful plan brings that drag back under your control.
One commonly overlooked planning opportunity is asset location. When implemented intentionally, asset location can improve long‑term, after‑tax outcomes without requiring you to change your investment strategy or increase risk.
What Is Asset Location?
Asset location is all about deciding which accounts to hold which investments in, so taxes take a smaller bite of our wealth over time.
Different types of accounts are taxed differently, and different investments generate different types of income. Asset location aligns the two around a simple goal:
Place investments in the accounts where they are taxed most efficiently.
Over time, that efficiency can translate into meaningfully higher after-tax wealth and retirement income.
Why Asset Location Matters
Two investors can own the exact same portfolio and earn the same pre-tax return and still end up with very different outcomes after taxes.
That difference often comes down to:
- How income is taxed
- When taxes are triggered
- Which accounts assets are held in
Asset location works behind the scenes, which means you may not see it on a statement—but its cumulative impact can be substantial over time.
Understanding Account Types and Tax Treatment
Before asset location can work, it helps to understand how common account types are taxed.
Taxable Accounts
- Interest, dividends, and realized capital gains may be taxed each year
- Capital gains taxes can often be deferred until an investment is sold
- Step-up in cost basis may apply at death (Meaning the investment’s value is reset to its current market value, so beneficiaries often avoid capital gains taxes on growth that happened during your lifetime.)
Tax-Deferred Accounts (Traditional IRA, 401(k))
- Contributions are typically pre-tax
- Investments grow tax-deferred
- Withdrawals are taxed, based on your income bracket at the time of withdrawal, as ordinary income
Tax-Free Accounts (Roth IRA, Roth 401(k))
- Contributions are made with after-tax dollars
- Qualified withdrawals are tax-free
Each account type plays a different role and asset location helps determine what belongs where.
General Asset Location Guidelines
While there is no universal rule, some principles tend to hold true.
Stocks Often Belong in Taxable Accounts
Stocks typically generate:
- Qualified dividends
- Long-term capital gains
Both are generally taxed at more favorable rates than ordinary income.
Stocks also allow for tax control. Investors can often decide when to sell and realize gains, which creates planning flexibility.
Bonds and Ordinary Income Investments Often Belong in Tax-Deferred Accounts
Bond interest is usually taxed as ordinary income. Holding these investments in tax-deferred accounts can:
- Delay taxation
- Reduce annual tax drag (the portion of returns lost to ongoing taxes)
This is often more efficient than holding them in taxable accounts.
REITs Are a Notable Exception
Although REITs are considered equities, most of their return comes from distributions taxed as ordinary income.
For that reason, REITs are often better suited for:
- Tax-deferred accounts
- Tax-free accounts when available
Additional Benefits of Thoughtful Asset Location
Tax-Loss Harvesting Opportunities
Holding volatile assets like stocks in taxable accounts allows investors to strategically sell investments at a loss to help reduce taxes. Those losses can:
- Offset current capital gains
- Reduce taxable income (within IRS limits)
- Be carried forward to future years
Estate Planning Advantages
Assets held in taxable accounts may receive a step-up in cost basis at death, potentially eliminating capital gains taxes for beneficiaries.
Charitable Giving Strategies
For charitably inclined investors, donating appreciated securities can be far more tax-efficient than giving cash, especially if those assets are held in taxable accounts.
Why Asset Location Isn’t One-Size-Fits-All
In theory, asset location sounds straightforward. In practice, it’s more nuanced.
Effective implementation depends on:
- Your marginal tax bracket (the rate applied to your last dollar of income)
- Current and future income expectations
- Time horizon
- Liquidity needs
- Account mix
- Retirement timeline
- Estate planning goals
For example, the benefit of asset location is typically greater for higher-income households than for investors in lower tax brackets. Similarly, proximity to retirement can influence how aggressively these strategies are used.
Asset Location and Retirement Withdrawals
Asset location doesn’t stop at accumulation. It also affects how assets are used in retirement.
Withdrawals often begin from taxable accounts before required distributions from tax-deferred accounts begin (when the IRS requires you to start taking money out). Without coordination, this can:
- Create unintended tax consequences
- Leave portfolios unbalanced
- Push retirees into higher tax brackets unnecessarily
A thoughtful withdrawal strategy considers both taxes and asset location to maintain alignment with long-term goals.
The Value of Professional Oversight
Asset location strategies rarely succeed in isolation. They work best when integrated into a broader financial plan that connects taxes, investments, retirement income, and estate planning.
At Plancorp, asset location is one of the planning strategies we use quietly in the background to improve long-term results and help clients keep more of what they earn without adding unnecessary complexity.
The Bottom Line
Asset location won’t show up as a line item on your investment statement. But over time, it can make a meaningful difference in after-tax outcomes. There’s no cookie-cutter solution—but for most investors, there are opportunities hiding in plain sight.
Ready to understand whether your assets are working as tax‑efficiently as they could be? Schedule a private strategy session with our team today and get tailored guidance for your long‑term plan.
