Asset Location

The strategy of placing different asset classes in different account types (taxable, traditional IRA, Roth) to maximize tax efficiency.

What it actually means

Asset location is distinct from asset allocation. Allocation is what you own (stocks vs bonds vs real estate). Location is which account holds it (taxable brokerage vs Traditional IRA vs Roth IRA vs HSA vs 529). Most FI calculators ignore location and project terminal wealth as if all dollars are taxed identically — they're not. Tax-inefficient assets (REITs, taxable bonds, dividend-heavy funds) belong in tax-deferred or tax-free accounts. Tax-efficient assets (broad index funds with low turnover) belong in taxable.

Distinguishing it from look-alikes

A 25-year worked example with the same 60/40 stocks/bonds allocation can produce ~$330K in terminal-wealth difference between optimized and unoptimized location. That's entirely from tax drag arbitrage — same allocation, different placement. The Roth-priority rule: highest-expected-return assets generally go in Roth (since gains are tax-free); lowest-expected-return assets go in taxable.

Examples

REIT funds in taxable account

Bad — REIT dividends are ordinary-income-taxed. Move to Roth or Traditional IRA.

Total stock market index in Roth

Good — tax-free growth on highest-return asset class

Municipal bonds in IRA

Bad — wastes the muni's tax-free interest in an already-tax-deferred wrapper