Why Tax Location Matters (and How It Can Help You Keep More of Your Returns)

Most people spend a lot of time thinking about what they invest in. Far fewer think about where they invest—and that difference can have a major impact on long-term results.

This concept is called tax location, and it’s one of the most overlooked ways to grow your wealth without taking on more risk. In this post, we’ll break down what tax location is, why it matters, and how to put it to work in your portfolio.

What Is Tax Location?

Think of tax location like arranging furniture in a room. You’re not buying anything new—you’re simply placing what you already own in the right spots, so everything functions better.

There are three main types of accounts where your money can live:

• Taxable accounts
  These are brokerage accounts, typically individual or joint.

• Tax-deferred accounts
  Examples include traditional IRAs and 401(k)s.

• Tax-free accounts
  Such as Roth IRAs and Roth 401(k)s.

There are many other account types, but each is taxed differently. The key to tax location is placing the right investments in the right accounts so you can keep more of your returns.

Why Tax Location Makes Such a Big Difference

Some investments create a lot of taxable activity—interest, dividends, and capital gains. Others generate very little.

Instead of placing every investment in every account, tax location focuses on matching investments with the account type that minimizes taxes.

Here are a few simple examples:

• Bonds often work well in tax-deferred accounts because they generate regular taxable income.

• Stocks, index funds, and ETFs often fit well in taxable brokerage accounts since they tend to be more tax efficient.

• High-growth assets often work well in Roth accounts because the growth can come out completely tax-free.

This approach allows you to improve efficiency without changing your overall investment strategy or risk level.

Tax Location Is About Strategy, Not More Risk

Here’s what surprises most people: tax location isn’t about taking on more risk. It’s about being strategic with the risk you’re already taking.

You can hold the exact same investments, but depending on where you place them, your after-tax return can look very different. Over 10, 20, or even 30 years, that difference can compound into something meaningful.

Pros and Cons of Tax Location

Like any financial strategy, tax location comes with trade-offs.

Pros

• Can add years of additional income in retirement

• Increases after-tax returns without changing investments

• Reduces tax drag over time

• Works alongside a long-term retirement plan

Cons

• Requires coordination across multiple accounts

• Not every asset fits neatly into one category

• Can be confusing without guidance or a clear plan

When done correctly, however, tax location is one of the simplest ways to improve long-term financial outcomes.

The Bottom Line

When your investments are placed intentionally, you gain more efficiency, more growth, and more money that stays in your pocket instead of going to taxes.

If you’ve never looked at the tax location of your portfolio, now is a great time to review it.