In wealth management, it’s not just what you invest in. It’s also where you hold those investments that can meaningfully impact long-term outcomes. This idea, known as asset location, is a core but often underappreciated part of a well-structured investment strategy. For high-net-worth and ultra-high-net-worth families, optimizing asset location can result in significant tax savings over time, without changing the underlying investments.
As we begin 2025 with an increasingly complex tax environment and shifting market conditions, now is an opportune time to revisit asset location and its role in efficient wealth accumulation.
Asset Allocation vs. Asset Location
Let’s start by differentiating two common terms. Asset allocation refers to how you divide your investments among asset classes, such as stocks, bonds, real estate, and others. Asset location refers to which types of accounts, whether taxable, tax deferred, or tax free, hold each of those investments.
Why does this matter? Because different investments generate different types of income, and that income is taxed in different ways. Matching the right investment with the right account type is the key to tax efficiency.
Account Types and Tax Treatment
There are three primary account types to consider:
Taxable accounts – These include individual, joint, or trust brokerage accounts. Income from these accounts is taxed annually. Qualified dividends and long-term capital gains are taxed at preferential rates, while short-term gains and interest income are taxed as ordinary income.
Tax-deferred accounts – Traditional IRAs, 401(k)s, and certain annuities fall into this category. You don’t pay taxes while investments grow, but all withdrawals are taxed at ordinary income rates.
Tax-free accounts – Roth IRAs and Roth 401(k)s grow tax-free and provide tax-free withdrawals, assuming rules are met. Contributions are made with after-tax dollars.
Strategically placing different investments in the right accounts can reduce current and future tax liabilities, helping portfolios grow more efficiently.
What Belongs Where? A Simple Framework.
While each situation is unique, a general asset location framework may look like this:
Taxable accounts: Ideal for tax-efficient investments like index funds, municipal bonds, and ETFs with low turnover. These assets generate minimal taxable income and benefit from long-term capital gains treatment.
Tax-deferred accounts: Best suited for tax-inefficient investments, such as taxable bonds, high-turnover mutual funds, and REITs, all of which can throw off interest or short-term capital gains taxed as ordinary income.
Tax-free (Roth) accounts: A prime location for high-growth, risk-on assets such as small-cap equities, emerging markets, and private equity — assets that have long time horizons and strong return potential. Growth here is tax-free.
Advanced Considerations for HNW Families
For clients in higher income brackets, other layers of tax drag often apply. The 3.8% Net Investment Income Tax (NIIT), the phaseout of itemized deductions, and exposure to alternative minimum tax (AMT) all erode investment returns. In this context, even a 0.5% improvement in after-tax returns becomes meaningful.
Additionally, HNW investors are more likely to hold:
Private investments – Often generating K-1 income or requiring specialized treatment.
Municipal bond ladders – Offering federally tax-free interest, sometimes state-free as well.
Concentrated stock positions – Requiring thoughtful unwind strategies to minimize tax consequences.
Working with advisors and CPAs to structure asset location intentionally can optimize not only income tax outcomes, but also estate tax, charitable, and gifting strategies.
Tax Law Volatility Increases the Stakes
The current federal tax landscape, still shaped by the Tax Cuts and Jobs Act (TCJA), is set to sunset after 2025. Unless legislation changes, marginal tax brackets will rise, estate tax exemptions will fall, and the standard deduction will be cut nearly in half.
In this context, asset location isn’t just a best practice — it’s a proactive measure. For example:
– Roth conversions may make sense now while rates are low.
– Harvesting long-term capital gains in lower-income years could reduce lifetime taxes.
– Positioning tax-inefficient investments in retirement plans can shield high-income clients from annual drag.
These moves can help create a more resilient plan in the face of legislative uncertainty.
Behavioral Benefits
While often discussed in technical terms, asset location also carries behavioral benefits. For example, housing volatile assets like small cap stocks in a Roth IRA, which investors do not check frequently, can reduce the likelihood of emotional selling during downturns. Meanwhile, investors may feel more comfortable holding stable, dividend paying assets in their brokerage account, where income is visible and accessible.
These behavioral cues can lead to greater discipline and better outcomes over the long term.
Asset Locations Is Not Set and Forget
Life changes, tax laws evolve, markets shift — and asset location should be reviewed periodically in response. Key triggers include:
– A major liquidity event (e.g., sale of a business)
– Retirement or transition to a lower income phase
– Changes in tax law, especially surrounding Roth rules or capital gains
– Material inheritance or estate planning updates
For high net worth families, integrating asset location with broader planning such as charitable giving, family trusts, and inter generational planning is where real value emerges.
Final Thoughts
Asset location is a silent driver of after-tax wealth accumulation. When done well, it supports the larger objectives of wealth preservation, tax minimization, and philanthropic flexibility.
In the years ahead, tax efficiency will play an even larger role in portfolio strategy, and asset location will be a foundational element. Now is a good time to revisit how your assets are positioned and ensure your portfolio is not just diversified, but strategically placed for long term success.