As an investor, you’ve heard about the importance of diversification. You want a mix of assets like stocks and bonds that adheres to your investment goals, risk tolerance, and time horizon. But once you have the right asset allocation, it doesn’t stop there.
It continues with taxation—another thing that can significantly diminish your returns. And different types of accounts have different tax treatments. So where you keep your investments matters, too. This is a strategy known as asset location.
So let’s review some common account types and which types of assets may best be suited for which.
Taxable Accounts
Taxable accounts include your typical brokerage account. They can hold stocks, bonds, mutual funds, exchange-traded funds (ETFs), and virtually any security.
However, interest earned in these accounts is taxed annually at ordinary income tax rates. Currently, these can range from 10 percent to 37 percent.
Qualified dividends in a brokerage account are taxed at zero percent, 15 percent, or 20 percent. And ordinary dividends are taxed at ordinary income tax rates.
And if you sell investments held in taxable accounts for a profit, you’d face capital gains taxes. If you held these assets for a year or less, you’d be subject to short-term capital gains tax rates, which are the same as ordinary income tax rates.
But if you’ve held these assets for more than a year, you’d face long-term capital gains tax rates which can be zero percent, 15 percent, or 20 percent.
Many advisors recommend you set your brokerage account aside for tax-efficient investments like tax-exempt municipal bonds and municipal bond funds. This is because the income they earn is generally tax-free.
You may also keep stocks you tend to hold for more than a year here. This is because you’d face the favorable long-term capital gains tax rates if you sell these stocks later for a profit.
Passively managed index funds can hold a place here, too, because these funds buy and sell shares much less frequently than actively managed funds.
Brokerage accounts can also make sense if you intend to leave appreciated assets like stocks to heirs. This is because the Internal Revenue Service allows taxable accounts to get a step-up in cost basis.
Say you purchased shares of Stock A for $100,000. When you pass away, those shares are worth $900,000. Because of the step-up in cost basis, your heir won’t owe taxes on the $800,000 gain. But if you held those stocks in a tax-deferred account (more on that later), all withdrawals from the account would be taxed at your beneficiaries’ ordinary income tax rate.
Tax-Deferred Accounts
Tax-deferred accounts include retirement accounts like 401(k)s, 403(b)s, and individual retirement accounts (IRAs). For these types of accounts, qualified withdrawals at retirement would be taxed at ordinary income tax rates.
Earnings in these accounts grow tax-free. Holdings are not subject to capital gains taxes. This could make them ideal for actively managed mutual funds and ETFs.
Managers who run these types of funds actively buy and sell shares within the fund in order to overperform a particular benchmark. But selling shares for a profit could trigger capital gains taxes. However, if these shares are held in a tax-deferred account like a traditional IRA, you won’t have to worry about that.
An actively managed fund in a taxable account could raise some concerns though. If the fund manager decides to sell all shares of Stock A in 2026 after holding these since 2020, you may get an IRS form at the end of the year indicating large capital gains, even if you didn’t own Stock A in 2020.
In addition, high-dividend stocks and ETFs could make sense in a tax-deferred account too. This is because you won’t owe dividend taxes in a tax-deferred account. So dividends can be reinvested and continue to grow. You won’t be taxed until you make qualified withdrawals from the account in retirement. However, this strategy may not be ideal for all investors. So it’s important to discuss dividend stocks and ETFs with a qualified financial adviser.
Tax-Free Accounts
Tax-free accounts include Roth IRAs, Roth 401(k)s and Roth 403(B)s. Just like with tax-deferred accounts, investments grow tax-free in Roth accounts.
And qualified withdrawals are also tax-free as long as you’re at least 59 1/2 years old and at least five years have elapsed between the beginning of the tax year of your first contribution and withdrawal of earnings.
Because of its tax-free power, this is where you may want to park growth-oriented investments like stocks, mutual funds, and ETFs with serious growth potential.
The Bottom Line
Diversification is key when it comes to asset allocation. But it’s also important when it comes to asset location. To make the most out of your investments and minimize taxation, you need to carefully think about which types of accounts you’d use to hold which types of assets. Municipal bonds could make sense in a taxable account, and actively managed funds could fit well in a tax-deferred account. But it can always help to work closely with a qualified financial adviser to come up with a tax-efficient investment strategy that meets your unique needs.
The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
