Asset location
Also: asset location, asset placement, tax-aware asset location
The practice of placing different asset classes into the most tax-efficient account types: tax-inefficient assets (bonds, REITs) in pre-tax retirement accounts, tax-efficient equities in taxable brokerage or Roth.
Asset location decides which account type holds which investments. The logic is simple: bonds, REITs, and active funds with high turnover generate taxable distributions that are inefficient in a taxable brokerage account. Holding them in a 401(k), IRA, or Roth shields those distributions from annual tax. Broad stock index funds, which generate minimal annual distributions, are well-suited to taxable accounts where long-term capital gains and qualified dividends get preferential rates. Roth accounts should prioritize the highest-growth assets to maximize tax-free compounding.
Example: a couple has $1 million split 60/40 between stocks and bonds. Instead of each account holding 60/40, they put $400,000 of bonds in the 401(k), $200,000 of stock in the Roth IRA, and $400,000 of stock in the taxable brokerage. The total allocation is still 60/40, but annual interest from bonds escapes tax rather than being taxed at a 32% bracket.
Common mistake: ignoring asset location inside a target-date fund in each account. Target-date funds hold the same mix everywhere, eliminating the benefit.
Asset location matters whenever the filer holds multiple account types with meaningful balances and when a large new retirement contribution is being deployed.