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Imagine if you could increase your investment returns without increasing your risk? Now imagine you can do this with very little effort – and at no cost. I know, it sounds like the start of a late night infomercial. It’s not; it’s what’s called asset location.

Recently I received a voice mail message from a listener named David.  (You can leave a voice mail message–doughroller.net/voicemail–with a question or topic for the show. Here’s what David asked:

“Yes, Rob, this is David from Round Lake, Illinois. I’d like to know what type of funds, ETF’s should I have in a regular tax brokerage account to reduced my taxes. I currently have stock ETF’s in a Vanguard balanced fund in it. Am I doing okay? Thank you.”

We can broaden David’s question into two parts:

  1. What investments are good for a taxable account?
  2. What kind of investments should you have in a retirement account?

But before I tackle this topic, I want to emphasize that I am not a tax expert. Like most other topics on this blog, my answers to David’s question will represent my opinions based on my own experience and third party resources, which I’ll provide at the end of this blog post.

So What?

Let’s begin with so what question. Why is asset location important? With the right asset location, and the right investment mix in a taxable account, studies have shown that you can increase your after tax return by somewhere between 10 and 50 basis points annually.

That increase may not seem like much, but as I have pointed out many times in the past, when you multiply that improvement over a lifetime of investing, it increases your investment pile significantly.

Asset Location

So let’s dig in. First, we need to think beyond just taxable and retirement accounts. To take full advantage of asset location, we need to consider three types of accounts:

  1. Taxable Accounts
  2. Roth Retirement Accounts
  3. Traditional Retirement Accounts

Why? The reason is that tax efficiency is about more than just whether we pay taxes now or later. It’s also about the tax rate will pay, and how much of our wealth will be taxed. With a Roth 401(k) or Roth IRA, we enjoy tax-free compounding. As a result, we want investments in a Roth that we think will grow the most.
With this in mind, here’s where I place my investments:

  • Roth Retirement Accounts: High Risk/High Return Investments (e.g., emerging markets, small cap value)
  • Traditional Retirement Accounts: Tax inefficient investments (bonds and REITS, actively managed funds with high turnover)
  • Taxable Accounts: Tax efficient investments (index funds, munis, individual stocks)

There are some potentially complicating factors.  As noted above with Roth accounts, it’s important to consider more than just the tax efficiency of an investment. We should also consider its potential growth and income. As a result, it may be preferable to  keep short term bond funds in a taxable account. Yes they generate taxable income every year, much like a savings account, but the yields are so low that the tax consequences may be minimal.

Final Thoughts

Ultimately you have to come up with a strategy that fits your specific circumstances. Some live in states with high tax rates, others live in states with moderate taxes. The difference can matter. Some should consider estate planning as part of the analysis. Finally, keep in mind that even the experts don’t always agree on the proper asset location.

It can be a challenge to determine just how tax efficient a mutual fund is. As a general rule, index funds are more tax efficient than actively managed funds. That being said, Morningstar offers some excellent tools to help you determine the tax ramifications of mutual funds and ETFs.

  • Turnover Ratio: Shows you how much of a portfolio is sold each year. The higher the ratio, generally, the less tax efficient the fund.
  • Tax Adjusted Returns: Morningstar offers after-tax return estimates for the mutual funds it covers.
  • Tax Cost Ratio: Similar to an expense ratio, Morningstar calculates the effects of taxes. The lower the number the better.

Check out Morningstar for more details.

Further Reading

Author Bio

Total Articles: 1080
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

1 comment
Walter says:


I have followed your site for a couple of years. I also read MMM, Mad Fientist, ERE and JL Collins NH. All of your sites have helped me focus my investments. Thanks.

My question is this:
I own international ETFs like VWO and VSS and a int’l REIT VNQI. I have to pay international taxes, which I can get IRS credit for. Right now I have these in my brokerage account, not my Roth IRA. Is this this right move?

If I were to hold these in my tax deferred Roth IRA, I would not get IRS tax credit for this, right?

One of the reasons that I ask is because in addition to my adding to these holdings, I am going to be buying a int’l bond fund soon, BNDX, and I want to make sure that I hold it in the right account. I could always sell something in my Roth IRA and re-buy it in my brokerage account while I devote more of my Roth IRA to the above-listed int’l holdings.

I have read conflicting advice regarding this matter. For instance, Future Advisor, one of the Robo Advisors out there that I use, but have not subscribed to or given the ability to trade in my accounts, seems to be advising me to purchase int’l holdings in my Roth IRA. If I followed their advice, I think I would be forgoing these international tax credits, right? This could amount to thousands of dollars a year for me.

Another critique of Future Advisor, that you may want to share with your followers, is that while they offer the first 12 months free for active duty service members, of which I am one, they do not use the holdings in my TSP account when they offer advice. So, I am finding that the advice that they give me doesn’t make a lot of sense. They are telling me to purchase holdings like the I fund, which I understand basically mimics the EFA. They also recommend that I buy funds that are similar to the S fund, which basically mimics the Russell 2000. I use IWM, as an ETF proxy for the S fund. As I have six figures in the I and S funds already, I am not prone to trust what would otherwise be decent investment advice from Future Advisor. What’s odd is that I have given them access to include the TSP holdings, and they show the funds as part of my net total. However, they do not consider the holdings when offering me advice. This sort of glitch will keep me from becoming a full-fledged and after twelve months paying subscriber to their service.

Thanks for your time. I’ll be reading your newsletter every week.