Reduce Taxes Through Proper Asset Location

Let me ask you an important question: Are your investments in the right accounts?

Let’s assume you have decided on your portfolio asset allocation (what proportion of your portfolio will be invested in stocks, bonds, real estate, commodities, etc.) and the specific investments you want to have in your portfolio.  Great! But if you don't place them in the right type of account—Traditional IRA/401(k), Roth, or Taxable—you could be wasting money on taxes every year.

Asset location is the simple art of using the tax code to boost your portfolio’s after-tax return without taking on any extra risk.

Think of proper asset location as tax-efficiency for your portfolio — the art of placing the right investments in the right types of accounts to keep more of your returns working for you instead of going to the tax collector.

Here’s the Big Idea:  Reduce the Tax Drag on Your Portfolio 💡

Think of your portfolio like a car driving toward your financial goals.  Taxes are like hitching a trailer (the IRS) to the back of your car — the lighter and more aerodynamic the trailer, the less it will slow down your progress.  Fortunately, with a little bit of thought you can reduce the tax drag on your portfolio.

Different types of investments generate different kinds of income that are taxed very differently — some slow down your portfolio’s performance much more than others.  Your goal is to use tax-advantaged accounts (Traditional and Roth) to reduce the tax drag for investments that generate the most taxable income.

Here is the ultimate guide to putting your assets in the right place:

Where Should Your Assets Live to Reduce Tax Drag? 🏡 

1️⃣ Tax-Deferred Accounts (Traditional IRA, 401(k), etc.) → Best for tax-inefficient assets like:

✅ Taxable bonds

✅ REITs (Real Estate Investment Trusts)

✅ Actively managed mutual funds

✅ TIPS (Treasury Inflation-Protected Securities) — because their inflation adjustments create phantom taxable income each year

2️⃣ Taxable Brokerage Accounts  → Best for tax-efficient assets like:

✅ Lower-dividend-paying or qualified-dividend stocks

✅ Municipal bonds (whose interest is tax-free)

✅ Tax-managed index funds and ETFs

✅ Real estate investments that benefit from depreciation and other deductions

3️⃣ Roth Accounts (Roth IRA, Roth 401(k))  → Best for high-growth assets:

✅ Stocks or funds expected to grow the most over time — since withdrawals are tax-free in retirement.

The Benefit Over Time

Proper asset location doesn't change your overall portfolio risk, but it can significantly change your after-tax return. By avoiding taxes on certain investment income year after year, the compounding effect can quietly add tens or even hundreds of thousands of dollars to your final retirement nest egg.

It's not just about what you invest in — it's about where you hold those investments.

Contact me or visit www.flourishingpathfinancial.com/book-online if you would like friendly, expert assistance with your financial planning.

Author:  John Macy, MBA, RICP®

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