Asset Location

Asset allocation decides what mix of investments to hold. Asset location decides where to hold them. Because different accounts are taxed differently, and different investments produce different kinds of taxable income, the placement can affect the after-tax return of the whole portfolio.

A common approach is to hold investments that produce a lot of taxable income each year, such as bonds or real estate investment trusts, inside tax-sheltered accounts, and investments that are already tax-efficient, such as broad share index funds held for the long term, in taxable accounts.

For example, an investor wanting 60% shares and 40% bonds overall might hold all the bonds in a retirement account and most of the shares in a taxable account, rather than splitting each account 60/40.

The benefit depends on tax rates, account sizes and expected returns, and it is usually modest but meaningful over many years. Asset location can make rebalancing more complicated, and it should not distort the overall investment mix the investor has chosen.