Key Takeaways
- Asset Allocation: What you buy (Stocks vs Bonds).
- Asset Location: Which account you put them in (IRA vs Taxable).
- The Goal: Minimize the "Tax Drag" on your portfolio to boost returns by 0.5% - 1.0% per year.
Introduction
You have a 401k, a Roth IRA, and a normal Brokerage account. You also own Stocks, Bonds, and REITs.
Randomly putting assets into accounts is costing you money. The government treats different assets differently. Optimization is free money.
Deep Dive: The Cheat Sheet
1. High-Tax Assets (Put in IRA / 401k)
These assets pay out regular income that is taxed at high "ordinary income" rates (up to 37%).
- Bonds: They pay interest every month.
- REITs: They pay high dividends.
Strategy: Shelter these in a Tax-Deferred account (Traditional IRA/401k) so you don't pay taxes on the income every year.
2. Tax-Efficient Assets (Put in Taxable Brokerage)
These assets don't generate much taxable income until you sell them.
- ETFs (VTI/VOO): They pay small dividends and are very tax-efficient.
- Municipal Bonds: Tax-exempt interest.
3. High-Growth Assets (Put in Roth IRA)
- Small Cap / Tech Stocks: Assets with the highest expected return.
Strategy: Since the Roth is tax-free forever, you want your biggest winners here. You want the account with the most growth to be the one with zero taxes.
Summary
Think about the tax bill before you click buy. Place your assets where they are treated best.
