What if you could potentially improve your investment returns without changing a single holding in your portfolio?
For many investors, that opportunity exists — not in what they invest in, but in where those investments are held.
What Is Asset Location?
Asset location is the practice of strategically placing investments across different types of accounts — such as taxable brokerage accounts, tax-deferred accounts (like traditional IRAs), and tax-free accounts (like Roth IRAs) — to improve tax efficiency.
The goal is simple: minimize the drag taxes can have on your portfolio over time.
Why It Matters
Two investors can hold identical portfolios with the same asset allocation — say, 60% stocks and 40% bonds — but experience different outcomes based solely on where those assets are held.
That’s because different investments are taxed in different ways:
- Interest from bonds is typically taxed as ordinary income.
- Stocks held long-term may benefit from lower capital gains tax rates.
- Some investments generate frequent taxable distributions, while others are more tax-efficient.
By placing tax-inefficient assets in tax-advantaged accounts and tax-efficient assets in taxable accounts, investors can potentially increase their after-tax returns without taking on additional risk.
A Simple Example
Consider a portfolio that includes both bonds and equities:
- Holding bonds in a tax-deferred account can shield their interest income from current taxation.
- Holding stocks in a taxable account may allow investors to benefit from long-term capital gains rates and tax-loss harvesting opportunities.
Meanwhile, high-growth assets are often well-suited for Roth accounts, where future gains can be withdrawn tax-free, assuming certain conditions are met.
Over time, the benefits of asset location can compound. Even small improvements in tax efficiency can lead to meaningful differences in portfolio value.
Common Mistakes to Avoid
Despite its potential benefits, asset location is often underutilized. Some common pitfalls include:
- Placing high-yield bonds or actively managed funds in taxable accounts
- Ignoring tax implications when rebalancing portfolios
- Overlooking the role of Roth accounts for long-term growth assets
It’s also important to consider factors like liquidity needs, time horizon, and future tax expectations when making asset location decisions.
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Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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