The expensive mistake hiding in plain sight
You've probably spent hours researching the best investments. But here's what most people miss: where you hold those investments can matter just as much as what you're holding.
Asset location—not to be confused with asset allocation—is about placing the right investments in the right tax buckets. Done correctly, it can add 0.5-1.5% to your annual after-tax returns without taking on any additional risk. That's meaningful money compounding over decades.
The problem? Most people treat all their accounts the same, which means they're probably leaving thousands on the table every year in unnecessary taxes.
What is asset location exactly?
Asset location is a tax-optimization strategy that matches investments to the account types where they'll be most tax-efficient.
Think of it this way: Every account has a different tax personality. Some accounts "leak" more tax than others. If you're holding high-income-producing assets in taxable accounts, you're creating unnecessary tax drag that compounds against you year after year.
Asset allocation = what you own (stocks vs. bonds vs. alternatives) Asset location = where you own it (taxable vs. Traditional IRA vs. Roth IRA)
The goal is to keep the quiet compounding working for you, not against you.
The three types of tax buckets
Every investment account falls into one of three tax categories:
Taxable accounts (brokerage):
- You pay taxes on dividends and interest each year
- Capital gains taxes when you sell (but only if there's a gain)
- Most tax-efficient for low-turnover investments
Tax-deferred accounts (Traditional IRA, 401k):
- No taxes while money grows
- Everything taxed as ordinary income when you withdraw
- Best for high-income-producing investments
Tax-free accounts (Roth IRA):
- No taxes ever on growth or withdrawals (if done correctly)
- Perfect for high-growth investments with long time horizons
The asset location framework
Here's how to match investments to the right tax buckets:
Note: Investment time horizons must be considered and are an important part of each plan.
The key insight: Tax-inefficient investments (like REITs and bonds) can potentially add 0.5-1.5% annual tax drag when held in taxable accounts. But move them to a Traditional IRA, and that drag could disappear entirely.
Common asset location mistakes that cost money
Holding bond funds in taxable accounts Bond interest is taxed at ordinary income rates - potentially 37% for high earners. Keep bonds in Traditional IRAs instead.
Wasting Roth space on low-growth investments Your Roth IRA is tax-free forever. Depending on investment time horizons - don't fill it with conservative investments that don’t have the potential to grow much.
Keeping REITs in brokerage accounts REITs are notorious for generating taxable distributions. They belong in tax-deferred accounts.
Ignoring rebalancing opportunities When you need to rebalance, do it inside IRAs first to avoid triggering taxable events in brokerage accounts.
Not considering tax-loss harvesting Only taxable accounts allow you to harvest losses to offset gains. Don't waste this opportunity.
How to implement asset location
Step 1: Inventory your accounts List all your investment accounts and their current holdings. Note which are taxable, tax-deferred, or tax-free.
Step 2: Identify misplaced investments Look for high-income assets (bonds, REITs) in taxable accounts, or low-growth investments taking up valuable Roth space.
Step 3: Use new contributions to rebalance Rather than selling and triggering taxes, use new money to gradually move toward better asset location.
Step 4: Prioritize the biggest wins Start with the most tax-inefficient holdings in the wrong accounts—these could provide the biggest immediate benefit.
Step 5: Rebalance inside IRAs when possible When you need to adjust your allocation, make changes inside retirement accounts first to avoid taxable events.
Quick Answers: Asset location questions
"Does asset location matter if my portfolio is under $250K?" Less so. Focus on savings rate and basic diversification first. Asset location becomes more valuable as your portfolio grows.
"What if I'm in a low tax bracket?" The benefits are smaller but still meaningful. Plus, tax brackets tend to increase over time as income grows.
"Can I move investments between account types without penalties?" Not directly. You'd need to sell in one account and buy in another, which could trigger taxes. Better to use new contributions to gradually improve your asset location.
"What about tax-loss harvesting?" This only works in taxable accounts, which is another reason to keep some investments there—you can harvest losses to offset gains.
Can Titan help with asset location?
Yes. If you're a Titan client, we can:
- Analyze your current asset location across all account types
- Identify the biggest optimization opportunities that could save you the most in taxes
- Implement changes strategically using new contributions to avoid triggering unnecessary tax events
- Coordinate with tax-loss harvesting in your taxable accounts
Asset location is one of those strategies that costs nothing to implement but can meaningfully boost your after-tax returns over time.
Want to optimize your asset location strategy?
Talk to a Titan advisor to get a personalized analysis of how much you could save by putting your investments in the right tax buckets.
About Titan
Titan is a modern Registered Investment Advisor (RIA) helping high-earning professionals navigate complex money decisions. With a dedicated advisor and access to proprietary strategies and alternative investment options, we're your go-to wealth team for everything from RSUs to retirement. Learn more at www.titan.com.
