By Jonathan Hall, BA, MBA, MSFS, CFP®
If you have a net worth north of $10 million, you’ve probably spent a lot of time thinking about asset allocation. Stocks versus bonds. Domestic versus international. Growth versus value. Those decisions matter.
But here’s something that might surprise you: once your portfolio reaches a certain size, where you hold your investments can matter just as much as what you hold. Financial professionals call this concept “asset location,” and it’s one of the most overlooked strategies in wealth management.
Asset Allocation Versus Asset Location
Asset allocation is the mix of investments in your portfolio. It’s the classic question of how much to allocate to stocks, bonds, real estate, and other asset classes. Most financial advisors spend a lot of time here, and for good reason. Getting this right is the foundation of any sound investment plan.
Asset location is different. It’s about placing each type of investment in the most tax-efficient account. You might own the same investments either way. The difference is which account holds what. Think of it like packing a suitcase. You’re bringing the same clothes on the trip. Asset location makes sure everything fits better and doesn’t get wrinkled.
For someone with a $500,000 portfolio, the tax savings from smart asset location might be modest. For someone with $10 million or more, the impact can be enormous. We’re talking about potentially hundreds of thousands of dollars over a lifetime. Research from Vanguard has shown that a disciplined asset location strategy can boost after-tax returns between 0.05% and 0.30% per year.
The Three Buckets You Need to Understand
When it comes to asset location, you’re working with three main types of accounts, each with its own tax treatment.
The first is tax-deferred accounts. These include traditional IRAs, 401(k)s, and similar retirement plans. You get a tax deduction when money goes in, your investments grow without being taxed along the way, and you pay ordinary income tax when you take money out. These accounts are ideal for investments that generate significant taxable income, like bonds and real estate investment trusts (REITs).
The second is tax-free accounts. Roth IRAs and Roth 401(k)s fall into this category. You don’t get a deduction going in, but your investments grow tax-free and qualified distributions come out tax-free in retirement. These are typically best for investments with the highest growth potential, like small-cap stocks or emerging market funds, because you’ll never pay taxes on those gains.
The third is taxable brokerage accounts. There’s no special tax treatment on the way in or out. You pay capital gains taxes when you sell at a profit, and you’re taxed on dividends and interest along the way. These accounts are best suited for tax-efficient investments like passive investment funds that don’t generate much taxable income, as well as investments you might want to harvest losses from.
Why This Matters So Much at $10 Million and Above
At lower wealth levels, most of your money might sit in one or two accounts. Maybe you have a 401(k) and a small brokerage account. There’s not that much room to maneuver.
When your net worth exceeds $10 million, you’re likely holding assets across many different account types. You might have a traditional IRA, a Roth IRA, a taxable brokerage account, a trust, maybe a donor-advised fund, and possibly even a family limited partnership or a private placement life insurance policy. Each of those buckets has different tax rules, and each creates an opportunity.
The math gets significant in a hurry. Let’s say you hold $2 million in bond funds that yield 5% a year. That’s $100,000 in interest income. If those bonds sit in your taxable account and you’re in the 37% federal bracket, you’re paying $37,000 in federal taxes on that income every year. Move those same bonds into your traditional IRA, and that tax bill disappears for now. The money stays invested and continues to compound. Over 20 years, that single move could be worth well over $500,000.
Meanwhile, if you’re holding index funds in your IRA that barely throw off any income, you’re wasting that valuable tax shelter. Those index funds would have been perfectly fine in your taxable account, where the long-term capital gains rate maxes out at 20% for most high earners, compared to the 37% ordinary income rate.
A Simple Framework for Getting it Right
The basic rule is straightforward. Put your most tax-inefficient investments in your most tax-sheltered accounts. Put your most tax-efficient investments in your taxable accounts.
Tax-deferred accounts like traditional IRAs and 401(k)s should typically hold bonds, REITs, actively managed funds that generate significant short-term gains, and other investments that produce substantial ordinary income. These are the investments that would hurt you the most in a taxable account.
Roth accounts usually hold your highest-growth investments. Since everything comes out tax-free, you want the assets with the biggest potential upside sitting here. Think small-cap funds, emerging markets, or any investment you believe will appreciate substantially over time.
Taxable accounts should hold broad-market passive funds, tax-managed funds, individual stocks you plan to hold long-term, and municipal bonds. These investments are already tax-efficient because they produce mostly long-term capital gains and qualified dividends, both of which are taxed at lower rates. According to a study by Morningstar researchers, proper asset location combined with tax-loss harvesting can improve an investor’s after-tax wealth by a meaningful margin, particularly for those in higher tax brackets. The study found that an investor with a $1 million portfolio can earn an average of an additional $112,000 over their retirement by following sound asset location principles.
The Hidden Cost of Getting It Wrong
One of the most common mistakes I see among high-net-worth clients is holding the same fund across all their accounts. Someone might own the same balanced fund in their IRA, their Roth, and their brokerage account. It feels consistent. It feels simple. It can also be leaving significant money on the table.
When every account holds the same investment, you’re ignoring the different tax rules that apply to each one. You’re paying taxes you didn’t need to pay. The overall asset allocation might look the same on paper, but the after-tax result can be dramatically different.
Another mistake is putting municipal bonds in retirement accounts. Munis are already tax-exempt, so there’s no benefit to sheltering them further. In fact, when you eventually withdraw from a traditional IRA, those distributions get taxed as ordinary income. You’ve effectively turned tax-free income into taxable income. That’s the opposite of what you want.
Don’t Forget about the Estate Planning Angle
For people with estates above the federal estate tax exemption (currently $15 million per person in 2026), asset location becomes even more critical. Different account types pass to heirs in very different ways.
Assets in taxable accounts get a step-up in cost basis at death. That means all the unrealized gains disappear, and your heirs can sell those investments without owing capital gains tax. This is one of the most powerful wealth transfer tools in the tax code, and it’s a strong argument for holding highly appreciated stocks in your taxable account rather than selling them during your lifetime.
Roth IRAs, on the other hand, pass to heirs income-tax-free. Your beneficiaries will have to take distributions over 10 years under current rules, but they won’t owe a penny in income tax on any of it. Traditional IRAs are the opposite. Every dollar your heirs withdraw gets taxed as ordinary income, which can push them into higher brackets during that 10-year distribution window.
So, when you’re thinking about which accounts to spend down first in retirement and which to preserve for your heirs, asset location plays a starring role. Spending from traditional IRAs first, while letting Roth and taxable accounts grow, can be a powerful long-term strategy.
The Bottom Line
Asset allocation will always be important. Getting the right mix of investments is the first step in any financial plan. Nobody is suggesting you skip it.
What I am suggesting is that once your portfolio has grown beyond $10 million, you owe it to yourself to think just as carefully about where each investment lives. The tax code creates different rules for different accounts, and smart investors take advantage of them all.
Asset location isn’t glamorous. Nobody talks about it at dinner parties. It doesn’t make for exciting headlines. It just quietly saves you money, year after year, in a way that can add up to a significant difference in your after-tax wealth.
If you haven’t reviewed your asset location strategy lately, now is a great time to start. A conversation with your financial advisor about which investments belong in which accounts could be one of the most valuable hours you spend all year.
