Asset Location Optimization
Time: 60-90 minutes to learn + annual review Cost: $0 (can save thousands in taxes annually) Platform: Ape AI (askape.com) + Your brokerage accounts Best for: Investors with multiple account types (taxable, IRA, 401k, Roth) Companion: Sage (for tax strategy) + Money (for account analysis)
What You'll Learn
By the end of this workflow, you'll be able to:
✅ Understand what asset location is and why it matters
✅ Determine which investments go in which account types
✅ Calculate the tax savings from optimal asset location
✅ Implement asset location strategy across multiple accounts
✅ Avoid common asset location mistakes that cost thousands
✅ Rebalance across accounts while maintaining optimal location
✅ Adjust asset location as your situation changes
What is Asset Location?
Asset Allocation vs. Asset Location
Don't confuse these two concepts!
Asset Allocation = WHAT you own
Example: 70% stocks, 30% bonds
Determines your risk/return profile
Asset Location = WHERE you hold what you own
Example: Stocks in Roth IRA, bonds in Traditional IRA
Determines your tax efficiency
Can add 0.2-0.75% annually to after-tax returns!
The Core Principle
Put tax-inefficient assets in tax-advantaged accounts. Put tax-efficient assets in taxable accounts.
Why?
Tax-advantaged accounts (IRAs, 401ks) shield investments from taxes
Wasting that shield on already-tax-efficient investments is inefficient
Taxable accounts get hit with taxes every year
Minimize taxes in taxable by holding tax-efficient assets there
The Three Account Types
Type 1: Taxable Brokerage Accounts
Characteristics:
No contribution limits (invest unlimited amounts)
No withdrawal penalties (access anytime)
TAXED every year on:
Dividends
Interest
Capital gains (when you sell)
Long-term capital gains taxed at 0%, 15%, or 20% (held >1 year)
Short-term capital gains taxed as ordinary income (held <1 year)
Foreign tax credits available (international stock dividends)
Pros:
Flexibility (withdraw anytime without penalty)
Step-up in cost basis at death (heirs inherit tax-free)
Foreign tax credit (can't claim in IRA)
Cons:
Annual tax drag from dividends, interest, capital gains
Less compounding (taxes reduce growth)
Best for: Tax-efficient investments (see below)
Type 2: Traditional IRA / 401(k) (Tax-Deferred)
Characteristics:
Contributions are tax-deductible (reduce taxable income now)
NO TAXES while invested (dividends, interest, gains all tax-free internally)
Taxed as ordinary income when withdrawn (retirement)
Required Minimum Distributions (RMDs) starting at age 73
Contribution limits: $7,000/year IRA, $23,000/year 401k (2024)
10% penalty + taxes if withdrawn before age 59.5
Pros:
Tax deduction today (lower current taxes)
Tax-deferred growth (compound without tax drag)
Great for high earners (deduction at high tax bracket, withdraw at lower bracket in retirement)
Cons:
All withdrawals taxed as ordinary income (even capital gains!)
Forced withdrawals (RMDs)
Can't claim foreign tax credit
Best for: Tax-inefficient investments that generate lots of taxable income
Type 3: Roth IRA / Roth 401(k) (Tax-Free)
Characteristics:
Contributions are NOT tax-deductible (pay taxes now)
NO TAXES ever again (dividends, interest, gains all tax-free)
Withdrawals in retirement are 100% tax-free
NO Required Minimum Distributions (can leave to heirs)
Contribution limits: $7,000/year IRA, $23,000/year 401k (2024)
Contributions (not earnings) can be withdrawn anytime penalty-free
Pros:
Tax-free growth forever (most powerful for long-term)
Tax-free withdrawals (avoid taxes in retirement)
No RMDs (great for estate planning)
Hedge against future tax rate increases
Cons:
No tax deduction today (pay taxes now)
Contribution limits (can't put unlimited amounts)
Income limits for Roth IRA (high earners may not qualify)
Best for: Investments with highest growth potential (you want growth to be tax-free!)
Tax Efficiency Hierarchy
Most Tax-Efficient → Least Tax-Efficient
1. MOST Tax-Efficient (Best for Taxable Accounts)
Total Market Index Funds / ETFs:
VTI, SCHB, ITOT (U.S. total market)
VXUS, IXUS, SCHF (International total market)
Why: Low turnover (rarely sell), minimal capital gains distributions
Typical annual tax drag: 0.1-0.3%
Large-Cap Growth Stocks (Non-Dividend):
Companies that don't pay dividends (Amazon, Google, Berkshire, etc.)
Why: No dividend income to tax annually, only taxed when YOU sell
Typical annual tax drag: 0-0.2%
Municipal Bonds (for high earners):
Interest is federally tax-exempt (and often state tax-exempt)
Why: Designed for taxable accounts
Typical annual tax drag: 0%
Tax-Managed Funds:
Vanguard Tax-Managed funds (VTMFX, etc.)
Why: Specifically designed to minimize taxable distributions
Typical annual tax drag: 0-0.1%
2. Moderately Tax-Efficient (OK for Taxable, Better in IRA)
Dividend-Paying Stocks:
Qualified dividends taxed at 0-20% (preferential rate)
Why: Some tax drag from dividends, but qualified rate is lower than ordinary income
Typical annual tax drag: 0.5-1.5% (depending on yield)
Value Stock Funds:
Often have higher dividend yields than growth funds
Why: More dividend income = more annual taxes
Typical annual tax drag: 0.5-1.0%
International Stock Funds (with foreign tax credit):
VEA, VXUS pay foreign taxes (can claim credit in taxable account)
Why: Foreign tax credit valuable, but also generates dividends
Typical annual tax drag: 0.3-0.7% (net of foreign tax credit)
3. Tax-INEFFICIENT (Best for Tax-Advantaged Accounts)
High-Dividend Stocks / Funds:
REITs (pay 90%+ of income as dividends)
Dividend aristocrats yielding 4-6%
Why: Large annual dividend income taxed every year
Typical annual tax drag: 2-4%
REITs (Real Estate Investment Trusts):
Dividends taxed as ordinary income (NOT qualified dividends!)
Why: Highest tax burden, taxed at 22-37%
Typical annual tax drag: 3-8%
Bonds (Treasury, Corporate):
Interest taxed as ordinary income annually
Why: High annual income, all taxed at ordinary rates
Typical annual tax drag: 1.5-4%
Actively Managed Funds:
Frequent trading generates capital gains distributions
Why: Manager's trades create taxable events YOU pay for
Typical annual tax drag: 1-3%
TIPS (Treasury Inflation-Protected Securities):
"Phantom income" from inflation adjustments (taxed annually even though you don't receive cash)
Why: Tax nightmare in taxable accounts
Typical annual tax drag: 1-2%
4. MOST Tax-Inefficient (MUST be in Tax-Advantaged)
High-Yield Bond Funds ("Junk Bonds"):
6-8% annual interest, all taxed as ordinary income
Why: Massive annual tax drag
Typical annual tax drag: 4-8%
Commodities / Futures Funds:
Complex tax treatment (60/40 rule)
Why: Generates K-1s, complicated taxes
Typical annual tax drag: Varies wildly
International Bonds:
Foreign tax withholding + ordinary income tax
Why: Double taxation issue
Typical annual tax drag: 2-5%
MLPs (Master Limited Partnerships):
Generates K-1 tax forms (complex)
Why: Can create "unrelated business taxable income" (UBTI) in IRAs
Typical annual tax drag: Complex, consult CPA
The Optimal Asset Location Strategy
The Priority System
Step 1: Fill Roth IRA/Roth 401k First
Put in Roth (highest growth potential):
Small-cap growth stocks (highest long-term return potential)
Emerging market stocks (high growth, high volatility)
Individual high-growth stocks (if you pick stocks)
Sector ETFs with highest growth (tech, innovation, etc.)
Why? Tax-free growth on highest-returning assets = maximum compounding
Example ($10,000 Roth IRA):
$6,000 small-cap growth (VBK or SCHA)
$3,000 emerging markets (VWO or IEMG)
$1,000 individual growth stock (your highest conviction pick)
Step 2: Fill Traditional IRA/401k Next
Put in Traditional IRA/401k (tax-inefficient income generators):
Bonds (Treasury, corporate, high-yield)
REITs (real estate investment trusts)
High-dividend stocks (dividend aristocrats, utilities)
Actively managed funds (if you must own them)
International bonds
Why? Shield high-income-generating assets from annual taxes
Example ($50,000 Traditional IRA):
$30,000 bonds (BND, AGG)
$10,000 REITs (VNQ)
$10,000 high-dividend stocks (utilities, telecoms)
Step 3: Fill Taxable Brokerage Last
Put in Taxable (most tax-efficient):
U.S. total market index funds (VTI, SCHB)
S&P 500 index funds (VOO, IVV)
International stocks (VEA, VXUS) - to claim foreign tax credit
Municipal bonds (for high earners)
Non-dividend-paying growth stocks
Tax-managed funds
Why? These generate minimal taxable income annually
Example ($100,000 Taxable Brokerage):
$60,000 VTI (U.S. total market)
$30,000 VXUS (international stocks)
$10,000 municipal bonds (if high tax bracket)
Complete Example: $200,000 Across Three Accounts
Goal: 60% stocks, 40% bonds overall allocation
Account Breakdown:
Roth IRA: $20,000 (10% of portfolio)
100% Small-Cap/Emerging Markets:
$12,000 VBK (small-cap growth)
$8,000 VWO (emerging markets)
Traditional 401(k): $80,000 (40% of portfolio)
50% Bonds, 50% REITs/High-Dividend:
$40,000 BND (total bond market)
$20,000 VNQ (REITs)
$20,000 SCHD (dividend-focused stocks)
Taxable Brokerage: $100,000 (50% of portfolio)
100% Tax-Efficient Stocks:
$70,000 VTI (U.S. total market)
$30,000 VXUS (international stocks)
Overall Allocation Check:
Stocks:
Roth: $20k (small-cap + EM)
Trad: $20k (dividend stocks)
Taxable: $100k (broad market)
Total: $140k = 70% ✅ (close to 60% target, bit aggressive but OK)
Bonds:
Roth: $0
Trad: $40k
Taxable: $0
Total: $40k = 20% (below 40% target)
REITs:
Trad: $20k = 10%
Adjusted for 60/40: Let me recalculate...
Actually, let's use a cleaner example:
Better Example: $200,000 True 60/40
Roth IRA: $20,000
$20,000 VWO (emerging markets - highest growth potential)
Traditional 401(k): $80,000
$60,000 BND (bonds - tax-inefficient)
$20,000 VNQ (REITs - tax-inefficient)
Taxable Brokerage: $100,000
$60,000 VTI (U.S. stocks - tax-efficient)
$40,000 VXUS (international stocks - foreign tax credit)
Overall Allocation:
Stocks: $20k (EM) + $60k (U.S.) + $40k (intl) = $120k = 60% ✅
Bonds: $60k = 30%
REITs: $20k = 10%
Total: $200k ✅
Tax Efficiency:
Roth: Highest growth asset (EM) grows tax-free forever
Traditional IRA: Tax-inefficient bonds and REITs shielded from annual taxes
Taxable: Most tax-efficient stocks (low dividends, low turnover)
Calculating Tax Savings from Asset Location
The Math
Tax drag = Annual taxable income × Your tax rate
Example: WRONG way (bonds in taxable account)
$100,000 in taxable brokerage:
$100,000 in bonds yielding 4%
Annual interest: $4,000
Tax rate: 24% (ordinary income)
Annual tax: $4,000 × 24% = $960
Over 30 years:
Total tax drag: $960/year × 30 years = $28,800
Plus lost compounding on that $960 annually
Actual cost: ~$45,000+ (with compounding)
Example: RIGHT way (bonds in IRA, stocks in taxable)
$100,000 in taxable brokerage:
$100,000 in VTI yielding 1.5% (dividends)
Annual dividends: $1,500
Tax rate: 15% (qualified dividends)
Annual tax: $1,500 × 15% = $225
$100,000 in Traditional IRA:
$100,000 in bonds yielding 4%
Annual interest: $4,000
Tax: $0 (sheltered in IRA until withdrawal)
Annual tax savings:
Wrong way: $960/year
Right way: $225/year
Savings: $735/year
Over 30 years:
Total tax savings: $735 × 30 = $22,050
Plus compounding: ~$40,000+
You saved $40,000 just by putting the right asset in the right account!
Use Sage to Calculate Your Savings
Prompt:
Implementing Asset Location
Step 1: List All Your Accounts
Create a spreadsheet:
Roth IRA
Fidelity
$25,000
Tax-free
401(k)
Employer (Vanguard)
$120,000
Tax-deferred
Traditional IRA
Schwab
$30,000
Tax-deferred
Taxable Brokerage
Robinhood
$75,000
Taxable annually
TOTAL
$250,000
Step 2: List All Your Desired Holdings
Based on your target allocation (example: 70/30 stocks/bonds):
Desired Holdings:
U.S. Stocks (VTI): 50% = $125,000
International Stocks (VXUS): 10% = $25,000
Emerging Markets (VWO): 10% = $25,000
Bonds (BND): 25% = $62,500
REITs (VNQ): 5% = $12,500
Total: $250,000
Step 3: Assign Holdings to Accounts (Optimal Location)
Priority:
Roth IRA ($25,000) - Highest Growth:
$25,000 VWO (emerging markets)
401(k) + Traditional IRA ($150,000 total) - Tax-Inefficient:
$62,500 BND (bonds)
$12,500 VNQ (REITs)
$75,000 ??? (need to fill remaining space)
Wait, we have more IRA space than tax-inefficient holdings. Put tax-efficient there too:
$62,500 BND
$12,500 VNQ
$75,000 VTI (U.S. stocks - fill remaining IRA space)
Taxable Brokerage ($75,000) - Most Tax-Efficient:
$50,000 VTI (U.S. stocks)
$25,000 VXUS (international stocks - foreign tax credit)
Final Allocation:
Roth IRA
VWO (EM)
$25,000
Highest growth → tax-free
401(k) + Trad IRA
BND
$62,500
Tax-inefficient → sheltered
401(k) + Trad IRA
VNQ (REITs)
$12,500
Tax-inefficient → sheltered
401(k) + Trad IRA
VTI
$75,000
Overflow (ran out of inefficient assets)
Taxable
VTI
$50,000
Tax-efficient
Taxable
VXUS
$25,000
Foreign tax credit
Overall Allocation Check:
VTI: $75k + $50k = $125k = 50% ✅
VXUS: $25k = 10% ✅
VWO: $25k = 10% ✅
BND: $62.5k = 25% ✅
VNQ: $12.5k = 5% ✅
Perfect 70/30 stocks/bonds with optimal tax location!
Step 4: Execute Trades to Reposition
Current Holdings vs. Target:
Let's say you currently have:
Taxable: $75k all in high-dividend stocks
IRAs: $150k all in VTI
Roth: $25k in BND
Trades needed:
Taxable:
Sell $75k high-dividend stocks
Buy $50k VTI + $25k VXUS
Traditional IRA/401k:
Sell $75k VTI
Buy $62.5k BND + $12.5k VNQ
Roth IRA:
Sell $25k BND
Buy $25k VWO
Tax Implications:
Taxable account sales: May trigger capital gains taxes (consider tax-loss harvesting if available)
IRA/Roth sales: NO tax implications (can reposition freely!)
Important: Reposition tax-advantaged accounts FIRST (no tax cost), then taxable (manage taxes carefully)
Special Situations
Situation #1: Only Have Taxable Account (No IRA)
Problem: Can't put tax-inefficient assets anywhere
Solution:
Focus 100% on tax-efficient holdings
Avoid: Bonds, REITs, high-dividend stocks
Use: VTI, VXUS, municipal bonds (if high tax bracket), growth stocks
Example $100,000 portfolio (no IRA):
$60,000 VTI (U.S. stocks)
$30,000 VXUS (international)
$10,000 MUB (municipal bonds - tax-exempt)
Trade-off: Can't hold full bond allocation tax-efficiently, so either:
Accept higher stock allocation (more aggressive)
Use muni bonds (lower yield but tax-free)
Open an IRA! (even if it's just $7,000/year, it helps)
Situation #2: Only Have 401(k) / IRA (No Taxable)
Problem: All assets in tax-deferred, lose flexibility
Solution:
Doesn't matter WHERE you put assets (all are tax-sheltered)
Focus on normal asset allocation (60/40, 70/30, etc.)
Withdraw in retirement as ordinary income
Example $200,000 in 401(k) only:
$140,000 VTI (70% stocks)
$60,000 BND (30% bonds)
No need for asset location optimization (all in one account type)
Situation #3: High Earner (Can't Contribute to Roth)
Problem: Roth IRA income limits ($161,000 single, $240,000 married filing jointly for 2024)
Solution: Backdoor Roth Conversion
Contribute to Traditional IRA (non-deductible)
Immediately convert to Roth IRA
No income limits on conversions!
Or: Roth 401(k)
No income limits for Roth 401(k)
Can contribute even if you make $500k/year
Asset location still applies:
Put growth stocks in Roth 401(k) (if available)
Put bonds/REITs in Traditional 401(k)
Put tax-efficient stocks in taxable
Situation #4: Approaching Retirement (Need Income)
Asset location changes:
Traditional strategy (accumulation phase):
Bonds in IRA (defer taxes)
Stocks in taxable (tax-efficient growth)
Retirement strategy (distribution phase):
Bonds in taxable (generate income, pay lower capital gains tax on principal)
Stocks in Roth (let tax-free growth continue for heirs)
Use Traditional IRA first (required RMDs anyway)
Why the shift?
In retirement, you WANT taxable accounts to generate income (lower taxes than IRA withdrawals)
Roth becomes legacy account (pass to heirs tax-free)
Common Asset Location Mistakes
Mistake #1: Bonds in Taxable Account
The Trap: "I want safety in my taxable account, so I hold bonds there"
Why it's wrong:
Bonds generate 3-5% annual interest
Interest taxed as ordinary income (22-37% brackets)
Annual tax drag: 0.7-1.9% (enormous!)
The Fix:
Bonds in IRA (defer taxes)
Stocks in taxable (minimal dividends)
Tax savings: $500-$1,500/year on $100k portfolio
Mistake #2: REITs in Taxable Account
The Trap: "REITs yield 4-6%, I want that income!"
Why it's wrong:
REIT dividends taxed as ordinary income (NOT qualified dividends)
4% yield × 24% tax rate = 0.96% annual tax drag
Plus: No foreign tax credit, no step-up in basis at death
The Fix:
REITs in IRA/401k ONLY
Never hold REITs in taxable
Tax savings: $1,000+/year on $100k REIT position
Mistake #3: International Stocks in IRA
The Trap: "I'll put all my stocks in my IRA for tax-deferred growth"
Why it's wrong:
International stocks pay foreign taxes (15-30%)
In IRA: Can't claim foreign tax credit (lost forever)
In taxable: Can claim credit on tax return (recover most/all)
The Fix:
International stocks in taxable (claim foreign tax credit)
U.S. stocks can go in either
Tax savings: $200-$500/year on $100k international position
Mistake #4: Growth Stocks in Traditional IRA (Not Roth)
The Trap: "I'll put my Amazon/Tesla/NVIDIA in my Traditional IRA"
Why it's wrong:
Growth stocks might 10× over 20 years
In Traditional IRA: All gains taxed as ordinary income when withdrawn (22-37%)
In Roth: All gains tax-free forever (0%)
Example:
$10,000 invested in NVIDIA in 2018
2024: Worth $100,000 (10× gain)
Traditional IRA withdrawal:
$100,000 withdrawal taxed at 24% = $24,000 tax
You keep: $76,000
Roth IRA withdrawal:
$100,000 withdrawal, $0 tax
You keep: $100,000
Lost: $24,000 by using Traditional instead of Roth!
The Fix:
Highest-growth stocks in Roth
Bonds/stable assets in Traditional
Mistake #5: Not Rebalancing Across Accounts
The Trap: "I'll rebalance each account individually to 60/40"
Why it's wrong:
Doesn't maintain optimal tax location
Forces selling low-tax-drag assets in taxable
Generates unnecessary taxes
Example:
Wrong way:
Taxable: Rebalance to 60% stocks, 40% bonds
IRA: Rebalance to 60% stocks, 40% bonds
Problem: Now you have bonds in taxable (inefficient!)
Right way:
View ALL accounts as one portfolio
Rebalance across accounts to maintain:
Overall 60/40 allocation
Optimal tax location (bonds in IRA, stocks in taxable)
The Fix:
Calculate portfolio-wide allocation
Rebalance to targets while respecting tax location
Might mean 80/20 in taxable, 40/60 in IRA (averages to 60/40 overall)
Using Sage for Asset Location Planning
Complete Asset Location Review:
Example:
Success Checklist
By the end of this workflow, you should have:
🎉 Congratulations! You've mastered a strategy that can add 0.2-0.75% annually to your after-tax returns!
What's Next?
Now that you've mastered asset location:
Related Workflows:
Tax-Loss Harvesting - Combine with asset location for max tax savings
Multi-Account Portfolio Management - Coordinate across accounts
Rebalancing Your Portfolio - Rebalance across accounts
Monthly Portfolio Review - Monitor tax efficiency
Continue Learning:
Read "The Bogleheads' Guide to Tax-Efficient Investing"
Use portfolio tracking tools (Personal Capital, Empower)
Consult CPA for complex situations ($500k+ portfolios)
Join r/Bogleheads (asset location experts)
Take Action:
This week: Map current asset location
This month: Calculate tax savings from optimization
This quarter: Reposition assets (prioritize tax-advantaged accounts first)
Annually: Review and maintain optimal location
Remember: Asset location is like free money. Same investments, same allocation, less taxes!
"The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin." — Mark Twain
Keep more of your skin (money)!
Your future self will thank you! 💰📊🎯
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