When it comes to growing and protecting wealth, most people focus on what they invest in—stocks, bonds, real estate, etc. But where you hold those investments can be just as important. Asset location is the strategy of placing investments in different types of accounts (taxable, tax-deferred, and tax-free) to maximize after-tax returns by considering the tax treatment of each investment.
Think of it like organizing your kitchen. You wouldn’t store ice cream in the pantry or dry pasta in the freezer. The right placement matters. The same goes for your investments—placing tax-efficient assets in taxable accounts and tax-inefficient ones in tax-advantaged accounts can significantly impact long-term returns.
Let’s take a closer look at how asset location works and why it can make a meaningful difference in your financial future.
What Is Asset Location?
Asset location focuses on tax efficiency and distributes the asset classes in your investment portfolio—stocks, bonds, real estate, and more—across different savings vehicles:
- Tax-deferred accounts
- Tax-exempt accounts
- Taxable accounts
Of course, if you’re invested in just one asset class, asset location doesn’t apply. But even a portfolio of only stocks and bonds can benefit from the tax advantages of each type of account.
How Asset Location Works
Using asset location as a tax strategy to optimize your tax liability and keep more of what you earn on your investments can be impacted by two factors: how various account types are taxed and how investment income is taxed.
How Account Types Are Taxed
Consider these account types:
- Tax-Deferred Accounts: These include your 401(k) and traditional individual retirement accounts (IRAs), where you don’t pay taxes on the contributions and earnings until you withdraw the money (at which time withdrawals are taxed as ordinary income).
- Tax-Exempt Accounts: These include Roth IRAs, where you pay taxes before making contributions that can grow tax-free and be withdrawn tax-free.
- Taxable Accounts: These are investment accounts that do not provide tax deferral or exemptions. Earnings—such as interest, dividends, and capital gains—are subject to taxes in the year they are realized, regardless of whether funds are withdrawn.
How Investment Income Is Taxed
Your investment income is taxed in different ways. For instance:
- Interest income, ordinary dividends, and short-term gains (on assets held less than a year before being sold) are taxed as ordinary income, meaning you pay the same percentage in taxes as your federal income tax rate, which can be as high as 37 percent.
- Long-term capital gains (on assets held more than a year before being sold) and qualified dividends are taxed at a lower rate, ranging from zero percent to 23.8% percent, depending on your income level
Based on how the income of an asset type is taxed, you can match asset types with account types to potentially reduce your taxes.
It’s Not What You Make—It’s What You Keep
Most investors are trained to focus on gross returns—the headline numbers on their statements. But real wealth isn’t about what you make. It’s about what you keep. That’s where asset location comes in.
At Deerfield Financial Advisors, we take a different approach from the brokerage world. Instead of chasing the highest possible returns without regard for taxes, we focus on the net outcome—what actually stays in your pocket after taxes, fees, and other inefficiencies. Asset location is a key part of that strategy, helping our clients minimize unnecessary tax burdens and maximize long-term wealth.
The financial industry often glorifies beating the market. We care more about positioning your investments so you keep more of what you’ve earned. That’s the difference between a traditional broker and a wealth manager who takes a comprehensive approach and is highly attuned to your tax situation. Want to talk about how asset location fits into your financial plan? Let’s connect.
About Marcus
Marcus Miller is Wealth Manager and Shareholder at Deerfield Financial Advisors, a fee-only financial services and wealth management firm with offices in Indianapolis and Chicago. His role includes strategic planning, income tax optimization, insurance and estate planning, and investment management for a diverse group of clients. Implementing Deerfield’s unique financial planning approach called WealthwhileSM, Marcus helps clients live their best lives and focus on their most worthwhile passions. He is passionate about helping them pursue, experience, and maintain true financial independence for their families, without the sales pitch. He truly enjoys helping people and developing deep, meaningful relationships with clients.
Prior to joining Deerfield in 2012, Marcus gained valuable experience at a Big Four accounting firm, a nationally recognized brokerage house, and a distinguished independent advisory firm. He holds a Bachelor of Science and Master of Science in Accounting from Ball State University, the Certified Public Accountant and CERTIFIED FINANCIAL PLANNER® designations and is a NAPFA Registered Financial Advisor. Marcus serves on the Board of Happy Hollow Children’s Camp and on the Planned Giving Committee at the Indianapolis Zoo. He is a member of the Professional Advisor Leadership Council at the Central Indiana Community Foundation (CICF) and is involved at his daughters’ school.
Marcus resides in Carmel, IN, with his wife, Andrea, and their two daughters. They love spending time outdoors hiking, bicycling, camping, and traveling to national parks. (They have a goal to visit all 63 national parks; Yosemite is the current favorite.) An avid reader, especially of non-fiction, history, and finance books, Marcus also trains in Brazilian Jiu-Jitsu, likening it to a physical chess match that involves problem-solving and mental strengthening with physical consequences. To learn more about Marcus, connect with him on LinkedIn.
