Definition
Asset location is the practice of placing investments in the type of account, taxable or tax-advantaged, where they are taxed most efficiently.
How It Works
Tax-inefficient assets such as bonds or REITs are often best held in tax-deferred or tax-free accounts, while tax-efficient assets such as broad stock index funds can sit in taxable accounts. Coordinating placement across accounts can raise after-tax returns without changing the overall portfolio.
Example
An investor holds taxable bonds in an IRA and stock index funds in a brokerage account, reducing the annual tax drag of the bonds.
When It Works Best
It works best for investors with meaningful balances across both taxable and tax-advantaged accounts.
Who It Applies To
Investors holding multiple account types.
Watch-Outs
The benefit depends on having enough assets in different account types, and the optimal placement shifts with tax law and an investor's bracket.
