What Is Asset Location — and Why It Matters
If you already invest regularly, you’ve probably heard of asset allocation — spreading your money across stocks, bonds, and other assets.
But asset location takes that strategy one step further: it’s about where you hold those investments to get the best tax advantage.
In 2025, with rising taxes and shifting retirement laws, smart asset location can add 0.2%–0.6% more to your annual returns — just by optimizing which account holds what.
Step 1: Understand the Three Main Account Types
Before you can apply asset location, you need to know how different accounts are taxed.
- Taxable accounts (brokerage accounts)
- You pay taxes each year on dividends, interest, and capital gains.
- Offers flexibility for withdrawals anytime.
- Tax-deferred accounts (401(k), traditional IRA)
- You defer taxes until you withdraw money in retirement.
- Withdrawals are taxed as ordinary income.
- Tax-free accounts (Roth IRA, Roth 401(k))
- You pay taxes now, but future growth and withdrawals are 100% tax-free.
Each has a role — and placing the right investments in the right type can save you thousands.
Step 2: Know Which Investments Are Tax-Efficient
Some investments create a lot of taxable income, while others barely create any.
Tax-inefficient investments (better for tax-deferred or Roth accounts):
- Bonds and bond funds (generate regular interest)
- REITs (real estate investment trusts with high payouts)
- Actively managed funds (frequent trading = taxable events)
Tax-efficient investments (better for taxable accounts):
- Index funds and ETFs (low turnover)
- Municipal bonds (tax-free interest)
- Long-term stocks held for appreciation
By matching the right assets to the right account type, you reduce how much you lose to taxes each year.
Step 3: Match Asset Types to Account Types
Here’s the classic asset location formula that still works beautifully in 2025:
| Account Type | Ideal Investments | Why |
|---|---|---|
| Taxable | Index funds, ETFs, municipal bonds | Lower taxes on gains and dividends |
| Tax-deferred (401k/Traditional IRA) | Bonds, REITs, high-yield funds | Tax-deferred growth and income |
| Roth IRA | Growth-oriented stocks, small caps | Tax-free growth potential |
This setup maximizes after-tax returns while keeping risk balanced across accounts.
Step 4: Factor in Your Time Horizon
The longer your investment horizon, the more valuable tax-free growth becomes.
If you’re young or decades away from retirement, prioritize Roth accounts for high-growth assets.
If you’re closer to retirement, use tax-deferred accounts for income-producing assets that can be withdrawn later when your income (and tax rate) is lower.
Step 5: Rebalance Without Triggering Taxes
Rebalancing is key to staying on track, but it can trigger capital gains in taxable accounts.
To avoid this:
- Rebalance within tax-advantaged accounts first.
- Use new contributions to correct imbalances instead of selling existing holdings.
- Harvest losses strategically in taxable accounts to offset gains.
This keeps your portfolio aligned without giving away unnecessary dollars to the IRS.
Step 6: Use Tax-Loss Harvesting Strategically
In 2025, tax-loss harvesting tools are smarter and more automated than ever. Platforms like Wealthfront, Betterment, and Fidelity Managed Portfolios automatically sell losing investments to offset capital gains — reducing your tax bill while maintaining your target allocation.
Pro tip:
Be mindful of the IRS wash-sale rule — don’t buy a “substantially identical” investment within 30 days of selling it for a loss.
Step 7: Consider Future Tax Rates
Asset location is partly a tax prediction game.
If you expect to be in a higher tax bracket in retirement, Roth accounts (tax-free withdrawals) make more sense.
If you expect to be in a lower tax bracket, emphasize pre-tax contributions (Traditional 401(k), IRA) for maximum upfront savings.
Mixing both creates tax diversification, giving you flexibility when you start withdrawing in the future.
Step 8: Optimize for Couples and Families
Married couples often have multiple account types across employers and brokerages. Treat all of them as part of one combined portfolio rather than managing each separately.
For example:
- Partner A’s 401(k) might hold bond funds.
- Partner B’s Roth IRA might hold stock index funds.
- The shared taxable account might hold ETFs.
Together, this structure maximizes tax efficiency without increasing total risk.
Step 9: Revisit Annually or When Laws Change
Tax laws shift often — especially around retirement savings and contribution limits.
In 2025, keep an eye on:
- Roth conversion rules (potential phase-outs for high earners)
- Changes to RMDs (Required Minimum Distributions)
- Capital gains tax thresholds
A quick annual review with a financial advisor or CPA ensures your asset location remains optimized.
Step 10: Combine With Smart Asset Allocation
Asset location complements — not replaces — your asset allocation strategy.
Think of it this way:
- Allocation decides what you invest in.
- Location decides where you hold it.
Together, they create a fully optimized, tax-smart investment plan designed for both growth and efficiency.
Final Thoughts
Mastering asset location in 2025 isn’t about chasing trends — it’s about maximizing what you already have.
By placing each investment in the right account type, you can reduce taxes, increase net returns, and give your portfolio an invisible performance boost that compounds over time.
Smart investors don’t just diversify their assets — they diversify their tax strategies.