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The Power of Asset Location: How Strategic Investment Placement Can Boost Your Returns

February 18th, 2025 by Cory Large

Why Asset Location Matters

Most investors spend a lot of time figuring out what to invest in- stocks vs. bonds, growth vs. value, passive vs. active. However, an equally important question often gets ignored: Where should these investments be held?

This is the core idea behind asset location, a strategy designed to minimize tax drag and maximize after-tax returns. Think of asset location like meal prepping. If you store ingredients in the wrong place- like keeping fresh produce in the freezer or leaving milk on the counter, they spoil faster, wasting food and money. The same goes for investments: placing them in the wrong accounts can lead to unnecessary tax drag, reducing your portfolio’s efficiency and long-term returns. But when everything is stored where it belongs, your meals (and investments) stay fresh and work for you over time. Certain investments thrive in specific types of accounts, and making the right choices can increase your portfolio’s efficiency without taking on more risk.

If done correctly, strategic asset location can lead to higher net returns, compound tax savings over time, and give your investments a natural tailwind. And the best part? Unlike stock picking or market timing, asset location is a controllable and repeatable advantage that doesn’t depend on market conditions.

The Three Investment Account Types and Their Tax Treatments

To understand where to place investments, we need to start with the three main types of investment accounts:

  1. Taxable Accounts (Brokerage, Trust Accounts)
  • Tax treatment: Interest, dividends, and realized capital gains are taxed annually.
  • Best for: Tax-efficient investments (stocks, low-turnover ETFs, municipal bonds).
  • Why? Since you pay taxes each year, it’s best to hold investments that naturally minimize taxable distributions.
  1. Tax-Deferred Accounts (401(k), Traditional IRA, SEP IRA)
  • Tax treatment: Investments grow tax-deferred; you pay ordinary income tax upon withdrawal.
  • Best for: Tax-inefficient investments (REITs, high-yield bonds, actively managed funds).
  • Why? Income-producing assets are shielded from annual taxes, allowing for faster growth over time.
  1. Tax-Free Accounts (Roth IRA, Roth 401(k), HSA)
  • Tax treatment: No taxes on growth or withdrawals (if qualified).
  • Best for: High-growth, long-term investments (growth stocks, small caps, high-risk/high-reward assets).
  • Why? Since you won’t pay taxes on future gains, maximizing compounding in these accounts is key.

By matching investments with the right account type, you can reduce the overall tax burden on your portfolio, keeping more of your returns invested and working for you.

How Asset Location Can Lead to Higher Portfolio Returns

Consider two investors, Investor A and Investor B, who both start with a $500,000 portfolio allocated as follows:

  • 40% in stocks (growth-oriented, tax-efficient) – Expected Return: 10%
  • 40% in taxable bonds (income-generating, tax-inefficient) – Expected Return: 5%
  • 20% in REITs (high-dividend, tax-inefficient) – Expected Return: 8%

Scenario: Two Approaches to Asset Location

Outcome After 20 Years:

  • Investor A (Poor Asset Location): Portfolio grows to $2.1M
  • Investor B (Optimized Asset Location): Portfolio grows to $2.5M

Investor B’s portfolio is 19%, or $400,000 larger over 20 years simply due to better asset location- without taking additional investment risk.

Common Mistakes Investors Make with Asset Location

  1. Holding Tax-Inefficient Investments in Taxable Accounts
    • High-turnover mutual funds, REITs, and high-yield bonds generate significant taxable income. Placing them in a taxable account means losing returns to taxes each year.
  2. Underutilizing Tax-Free Accounts (Roth IRAs, HSAs)
    • Many investors underfund Roth IRAs because they focus on immediate tax deductions. But Roth accounts allow for tax-free compounding, making them the best place for growth-oriented investments.
  3. Treating Pre-Tax and After-Tax Dollars as Equal
    • Investors often fixate on their total portfolio value without considering after-tax wealth. A $1M pre-tax 401(k) is not the same as a $1M Roth IRA– because a portion of the 401(k) will eventually be taxed.
  4. Overlooking Tax Efficiency in Every Account
    • A key mistake many investors make is holding the same asset allocation in every account type. This is common when clients come to us for a second opinion. They may have a 60/40 stock-bond split in every single account without consideration for tax efficiency. This approach fails to maximize tax advantages, leading to unnecessary losses.

Asset Location Strategies for High-Net-Worth Investors

For clients with larger portfolios, asset location becomes even more important. A few additional strategies:

  1. Roth Conversions During Low-Income Years
    • Converting assets from a tax-deferred account (Traditional IRA) to a Roth IRA in lower-income years can reduce lifetime taxes and provide tax-free growth.
  2. Using Health Savings Accounts (HSAs) for Long-Term Growth
    • HSAs are the only accounts with triple tax benefits- tax-deductible contributions, tax-free growth, and tax-free withdrawals (for medical expenses). Holding high-growth assets here can be a powerful tax-advantaged strategy.
  3. Gifting Low-Cost Basis Stocks to Heirs
    • Taxable accounts benefit from the step-up in cost basis at death, meaning highly appreciated stocks can be passed to heirs without capital gains tax.

When Asset Location Matters Less

While asset location can provide a significant tax advantage, there are situations where it matters less:

  • Short-Term Investment Goals: If an investor plans to use a taxable account for a near-term purchase (e.g., a house in two years), prioritizing liquidity and stability over tax efficiency is more important.
  • Different Account Objectives: If one account is meant for short-term liquidity needs while another is for long-term retirement, tax location becomes secondary to ensuring the proper asset allocation for each specific goal.
  • Roth Conversions and Withdrawal Strategies: If an investor is engaging in Roth conversions or structured withdrawals during retirement, tax location should align with the tax bracket management strategy rather than strict asset location rules.

Final Thoughts: A “Free” Source of Outperformance

Asset location isn’t just about tax savings- it’s about increasing net returns and keeping more of your money invested. Unlike stock picking or market timing, this is an advantage you can control.

By placing the right assets in the right accounts, you’re essentially getting a boost in performance without added risk. And over time, those tax savings compound, creating a meaningful difference in wealth accumulation.

Call to Action: Check your current portfolio. If you see a lot of the same investments in multiple accounts, you may benefit from optimizing your asset location. If you’re unsure whether your investments are optimally structured, Anchor Bay Capital can help evaluate your asset location strategy and ensure your portfolio is working efficiently.