"What should I own?" is one of the most common ways an investment conversation begins, and that's not necessarily a bad thing. But there's a second question sitting right behind it that hardly ever gets asked: Which account should own it?
That second question has a name: asset location. And it can change how much of your return you actually get to keep after taxes.
I see this most with folks in their fifties and sixties. By then, most households have money spread across a 401(k), an IRA or two, maybe a Roth, and a regular brokerage account. Each one gets taxed differently. That's where location starts to matter.
First, Know What You're Working With
Qualified accounts (tax-deferred)
"Qualified" is a tax word, not a compliment. It doesn't mean the account is better or that anybody signed off on it. It just means the account follows IRS rules in exchange for special tax treatment. Think traditional IRA or 401(k).
Here's how they work. Your money grows without a tax bill every year. You pay the tax later, when you take money out, and those withdrawals are generally taxed as ordinary income. The catch is required minimum distributions. At a certain age, the IRS makes you start pulling money out whether you need it or not.
Roth accounts (tax-free)
A Roth IRA or Roth 401(k) flips that around. You put in money you've already paid tax on. Later, withdrawals come out income-tax free, as long as you follow the rules (generally age 59½ and the account has been open at least five years).
There's another perk. Roth IRAs have no required minimum distributions during your lifetime, and starting in 2024, Roth 401(k)s don't either. So a Roth isn't just a different flavor of IRA. It's a different tool.
Non-qualified accounts (taxable)
A regular brokerage account is non-qualified. No special tax treatment, so the taxes show up along the way. Interest and dividends are generally taxed in the year you receive them. Sell something for more than you paid, and you owe capital gains tax on the difference. And if you own mutual funds, they can pass capital gains through to you even in a year you didn't sell a thing.
Why the Right Account Matters
Investments that pay you every year
Picture a bond fund that pays interest every year. In a brokerage account, that interest lands on your tax return the year it's paid, whether you spend it or not. Put that same fund in a traditional IRA, and nothing gets taxed until you withdraw.
That's why a common approach is to hold investments that throw off regular taxable income inside qualified accounts, where the tax bill can wait. One exception worth knowing: municipal bond interest is generally already free from federal income tax. Munis usually belong in a taxable account. Put them in an IRA and you've wasted the tax break.
Investments held mainly for growth
Investments that mostly grow in value and pay little along the way don't create much tax each year. That makes them a reasonable fit for a regular brokerage account.
Some people also put the investments they expect to grow the most into a Roth, since that growth can come out income-tax free down the road.
Here's the honest part. Nobody knows ahead of time which investments will grow the most. This takes judgment, not a formula.
What only a brokerage account can do
Retirement accounts get most of the attention, but a regular brokerage account can do a few things they can't. Gains on investments held more than a year are generally taxed at lower long-term capital gains rates. Losses can offset gains, and up to $3,000 a year in leftover losses can offset ordinary income, with the rest carried forward.
There's also an estate angle. Investments in a taxable account generally get a new cost basis when the owner dies, reset to their value on that date. That can erase the built-in gain for your heirs. A traditional IRA works differently. Your heirs generally owe income tax as they take money out, and most non-spouse beneficiaries now have to empty an inherited IRA within 10 years.
That's also the flip side of holding stocks in an IRA. Gains that would have been taxed at capital gains rates in a brokerage account come out as ordinary income instead.
Where It Gets Tricky
Moving things around can cost you
Rearranging isn't free. Selling something in a brokerage account to move it somewhere else can trigger capital gains tax. And you can't just shovel money into an IRA or 401(k), because each one has an annual contribution limit.
Inside your IRAs and 401(k)s, though, you can buy and sell without triggering any tax. So most improvements happen gradually: new contributions, reinvested income, rebalancing inside the retirement accounts, and sometimes Roth conversions, where you pay the tax now to move money from traditional to Roth.
One trap to watch for. If you sell something at a loss in your brokerage account and buy the same investment in your IRA within 30 days before or after the sale, the wash-sale rule can wipe out that loss for good.
The right answer depends on your whole picture
Where an investment belongs depends on more than how it's taxed today. It depends on when you'll start withdrawing, what tax rates might look like later, how much you plan to spend, and what you want to leave to your family. Two households with the exact same investments can land on different answers, and both can be right.
It only works when everyone sees the same picture
This is the one I care about most. Asset location touches investments, taxes, and estate planning all at once. An advisor who only sees the portfolio, a CPA who only sees the tax return, and an attorney who only sees the estate documents can each make good decisions that don't fit together.
That's the whole idea behind the name Three Sixty. No blind spots. Your accounts need to be looked at as one household, not as a stack of separate statements.
Frequently Asked Questions
Asset allocation is the mix of what you own: stocks, bonds, and cash. Asset location is which type of account holds each piece.
Mostly, yes. Traditional IRAs and 401(k)s are the most common examples. Roths are retirement accounts too, they're just taxed differently, so some people (me included, in this post) treat them as their own bucket.
Not necessarily. Since each account is taxed differently, holding the same mix everywhere can leave tax savings on the table. Your overall mix across all your accounts should still match your goals and your comfort with risk, though.
Less so. Asset location has the most to work with when your money is spread across qualified, Roth, and taxable accounts.
Here's what I usually find. Accounts get opened one at a time, in different years, sometimes through different advisors. Each decision made sense when it was made. But nobody ever stepped back and looked at all of them together. Once you do, the placement questions get a whole lot clearer.
If you've never looked at where your investments are held and why, that's a good place to start. Give us a call.
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