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Not investment advice. Educational reading. See Disclaimer.
L.9 · BEGINNER · 2 MIN

Asset Location: Which Account Holds What

Asset location -- not allocation -- is deciding WHICH account holds WHICH investment to cut taxes. The idea: put tax-inefficient assets (taxable bonds, REITs, funds that throw off lots of income) inside tax-sheltered accounts (401(k)/IRA), and keep tax-efficient assets (broad stock index funds, which mostly grow untaxed until you sell) in taxable accounts. Same investments, lower lifetime tax -- one of the few genuine free lunches in personal investing.

Quiz · 5 questions ↓
§ 01
AssetTax-efficient?Best home
Broad stock index fund (VTI)Yes -- little annual taxable incomeTaxable account (or anywhere)
Taxable bonds / bond fundsNo -- interest taxed yearlyTax-advantaged (401k/IRA)
REITsNo -- high taxable distributionsTax-advantaged (401k/IRA)
Municipal bondsAlready tax-free interestTaxable account
§ 02

Asset location only matters once you have BOTH a taxable account and a tax-advantaged one with meaningful balances. If everything you own is inside a Roth IRA, there is nothing to locate -- it is all already shielded. It is an optimization for later, not a day-one worry.

§ 03
If you hold bonds in a taxable account and stock index funds in your IRA, consider flipping them over time -- bonds into the IRA, stocks into taxable -- to cut the tax drag. Mind capital-gains tax when moving things within a taxable account.
§ 04

Asset location is worth maybe a few tenths of a percent a year -- small, but free and compounding. Get allocation and low costs right first; this is the polish, not the foundation.

§ 05
You hold taxable bond funds in your brokerage (taxable) account and a stock index fund in your Roth IRA. What does asset location suggest?
Five questions · AI feedback

Sit with the ideas.

Which investment is the best candidate to hold INSIDE a tax-advantaged account (401k/IRA) rather than a taxable one?

Why:

Other lessons in this course.

  1. 01Asset Allocation by Time Horizon
  2. 02Stocks vs Bonds vs Cash: The Numbers
  3. 03The Three-Fund Portfolio
  4. 04Target-Date Funds and Glide Paths
  5. 05Opening a Brokerage Account
  6. 06Funding Your Account and Your First Buy
  7. 07Dollar-Cost Averaging vs Lump-Sum
  8. 08Rebalancing Rules: Calendar vs Threshold
  9. 09Asset Location: Which Account Holds What— reading now
  10. 10Tax-Loss Harvesting -- The Mechanics
  11. 11I-Bonds and TreasuryDirect
  12. 12Sequence-of-Returns Risk
  13. 13Equity Compensation as Concentrated Risk
  14. 14The 5 / 10 / 30-Year Checkup
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