Asset Location: The “Free Lunch” of Investing
Asset Location: The “Free Lunch” of Investing
Asset Allocation is what you buy. Asset Location is *where* you hold it. How to boost after-tax returns by 100bps annually just by putting the right asset in the right account.
Executive Summary
- The Tax Drag: Buying a high-yield bond (producing 8% interest) in a taxable brokerage account is suicide. You pay 40%+ tax on that interest every year. Buying a Growth Stock (Tesla) in an IRA is wasteful because you lose the “Step-Up in Basis” and “Long-Term Capital Gains” rates.
- The Rule (High-Tax vs. Low-Tax):
👉 Taxable Account: Hold assets with low yields and capital gains potential (ETFs, Growth Stocks, Muni Bonds).
👉 Tax-Deferred (IRA/401k): Hold assets with high regular income (High-Yield Bonds, REITs, Trading Strategies).
👉 Tax-Free (Roth): Hold assets with massive explosion potential (Crypto, Pre-IPO) to capture 100% of the moonshot tax-free. - The Alpha: Studies show proper Asset Location adds **0.75% to 1.5%** of extra return per year without taking any extra risk. It is pure efficiency.
The “Rebalancing” Trap
The Mistake: Rebalancing strictly within each account.
👉 The Fix: Rebalance across the whole portfolio. If stocks crash, sell bonds in your IRA and buy stocks in your Taxable account. Do not trigger capital gains taxes just to rebalance.
Mechanic: The Tax Efficiency Matrix
Bonds
Put in IRA
Stocks
Put in Taxable
REITs
Put in IRA
Crypto
Put in Roth
Simulation: $1M Portfolio Allocation
After-Tax Wealth (20 Years)
| Asset Class | Ideal Location | Reason |
|---|---|---|
| High Yield Debt | Traditional IRA / 401k | Avoids 37% Income Tax rates |
| S&P 500 ETF | Taxable Brokerage | Low turnover, qualifies for LTCG (20%) |
| Municipal Bonds | Taxable Brokerage | Already tax-free; wasted in an IRA |
“Don’t just ask ‘What should I buy?’ Ask ‘Where should I put it?’ Asset Location is the only free lunch in finance—it allows you to keep more of what you earn without taking a single ounce of additional market risk.”
Essential Resources
INTERNAL
BMT Playbooks
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