Asset Location
Placing each asset in the account type where it is taxed least.
What is Asset Location?
Distinct from asset allocation. Tax-inefficient assets - bonds, REITs, high-turnover funds - belong in tax-deferred accounts; tax-efficient equity index funds and assets destined for heirs belong in taxable accounts to capture the step-up.
Asset Location: a worked example
Holding a bond fund in an IRA and an index fund in a taxable account can add meaningful after-tax return.
What is the difference between Asset Location and Asset Allocation?
Allocation = what you own. Location = which account you own it in. Nearly identical words, entirely different decisions.
Often confused with Asset Allocation - see Asset Location vs Asset Allocation side by side.
More terms in Taxes & Account Types
Capital Gain (Short-Term vs. Long-Term)
Profit on a sale, taxed by how long you held it.
Cost Basis
What you paid, used to compute gain or loss on sale.
Wash Sale Rule
A loss is disallowed if you rebuy the same security within 30 days.
Tax-Loss Harvesting
Realizing losses to offset gains and up to $3,000 of ordinary income.
Qualified Dividend
A dividend taxed at long-term capital gains rates.
Traditional IRA / 401(k)
Deduct now, grow tax-deferred, pay ordinary income tax on withdrawal.
Roth IRA / Roth 401(k)
Pay tax now, grow tax-free, qualified withdrawals are untaxed.
Required Minimum Distribution (RMD)
Mandatory annual withdrawals from tax-deferred accounts starting at 73.