When it comes to investing for retirement, most people focus on what to invest in—stocks, bonds, or mutual funds. But where you hold those investments can be just as important. This concept is called asset location, and it can have a big impact on your after-tax returns.
Unfortunately, several myths about asset location lead investors to make avoidable mistakes. Let’s separate the truth from the noise so you can keep more of what you earn.
Myth 1: Asset location doesn’t really matter
It’s easy to think that as long as you’re investing, you’re on the right track—but where you place those investments can make a big difference.
Taxes can erode returns over time. Placing tax-efficient investments (like index funds or ETFs) in taxable accounts and tax-inefficient ones (like bonds or REITs) in retirement accounts can significantly improve your long-term gains.
Even small percentage differences in tax drag can add up to thousands over decades.
Myth 2: Asset allocation and asset location are the same
These two concepts sound similar, but they’re completely different.
Asset allocation is about how you divide your portfolio among different asset classes (stocks, bonds, cash, etc.).
Asset location, on the other hand, focuses on which accounts hold those assets—such as a traditional IRA, Roth IRA, or taxable brokerage account.
Think of allocation as “what you own,” and location as “where you keep it.” Both matter for balance and efficiency.
Myth 3: Always put high-growth assets in your Roth IRA
While Roth IRAs are ideal for tax-free growth, that doesn’t mean every high-growth asset belongs there. It depends on your overall tax situation.
For some investors, placing dividend-paying or interest-heavy assets in tax-deferred accounts (like a 401(k)) can save more in the long run. Others might benefit from using their Roth space for more aggressive investments.
There’s no one-size-fits-all answer—it’s about strategic balance.
Myth 4: Bonds always belong in tax-deferred accounts
This used to be true when bonds generated high interest rates and created large taxable income. But in today’s environment of lower yields and diversified bond ETFs, the rule isn’t as clear-cut.
Municipal bonds, for instance, are already tax-advantaged and can fit nicely in a taxable account. It’s all about evaluating your bond types and income needs.
Myth 5: Asset location is only for wealthy investors
This myth keeps too many people from optimizing their portfolios. You don’t need millions to benefit from smart asset placement—just multiple account types.
Even if you have a 401(k), a Roth IRA, and a brokerage account, thinking about tax efficiency can improve your long-term net returns without extra risk.
Myth 6: You need to constantly rebalance across all accounts
Rebalancing is important, but it doesn’t mean shuffling assets every month. Over-managing can trigger unnecessary taxes and transaction costs.
Instead, review your portfolio annually or after major life events. Use new contributions or dividend reinvestments to gradually bring your allocation back in line.
Real ways to optimize your asset location
- Place tax-efficient funds (like index ETFs) in taxable accounts
- Keep tax-heavy investments (like REITs or high-yield bonds) in retirement accounts
- Consider municipal bonds for taxable accounts if you’re in a high tax bracket
- Review your portfolio yearly for balance and tax efficiency
- Consult a financial advisor for personalized strategies
Key takeaway
Asset location isn’t about chasing the perfect setup—it’s about being intentional. By understanding how taxes impact your accounts, you can grow your investments more efficiently and keep more of your returns over time.
Smart asset location helps turn a good retirement plan into a great one.