EP Wealth Vice President, Advisor, Terri Velgara, CFP^®, shares how asset location strategies influence taxes across a portfolio and why these decisions may need to evolve over time.

The Importance of Asset Location: What to Consider for Tax-Conscious Investing

When it comes to managing a portfolio, there are things you can control and things you can't. You can't control what the market does in any given year. However, you may have influence over costs and you can be more intentional about how taxes affect your returns over time.

Asset location can be one of the most practical tools available for doing that. It's the strategy of placing investments in the types of accounts where they may be taxed most favorably, whether that's a tax-deferred retirement account, a tax-free Roth, or a taxable brokerage account.

When I work with clients, I look at those decisions across the full financial picture. That means considering not just the current tax year, but also how the portfolio may be used over the next 10, 15, or 20 years.

In this blog, I share how I approach asset location planning with clients to help them better understand how taxes affect their potential returns.

• How asset location differs from asset allocation, and how the two strategies work together
• A general framework for thinking about which investments may belong in which accounts
• Common oversights that may create avoidable tax consequences
• How asset location strategy may shift over time
• The value a financial advisor can add to this process 

Asset Location vs. Asset Allocation

Asset allocation and asset location address two different questions:

• Asset allocation: What mix of stocks, bonds, cash, and other investments should you own?
• Asset location: Which accounts should hold those investments?

Suppose your target portfolio allocation is 60% stocks and 40% bonds. That doesn’t necessarily mean your taxable account, traditional IRA, and Roth IRA should each be invested in 60% stocks and 40% bonds.

One account might hold more stocks while another holds more bonds if that positioning can help manage taxes more effectively. What matters is how those accounts work together to maintain the desired allocation across the total portfolio.

How asset location works in practice:

At EP Wealth, we might set one overall asset allocation across all of a client's accounts and then adjust the underlying holdings at the account level to reach that target. A client's Roth IRA might hold more aggressive growth positions while their trust account holds less aggressive positions — or vice versa, depending on the tax circumstances. The total portfolio works toward one goal, but each account plays a specific role within it.

Asset Location Strategy Starts with Time Horizon

When I start thinking about asset location, one of my first questions is: When is this money likely to be used?

The answer can be very different from one account to another, which is why time horizon and distribution timing drive how we think about positioning investments.

Taxable Accounts: Greater Flexibility for Nearer-Term Needs

While clients are still working and building savings before retirement, taxable accounts, like an individual or trust account, are often where they turn for nearer-term needs such as purchasing a home or funding another significant expense.

Taxable accounts offer flexibility, but investment income and realized gains can create taxes along the way.

In retirement, these accounts can take on a more strategic role. Equities held in taxable accounts are typically taxed at long-term capital gains rates, which may be more favorable than the ordinary income rates that apply to distributions from tax-deferred accounts, like IRAs.

Traditional IRAs and Other Tax-Deferred Accounts

Traditional retirement accounts offer tax deferral while assets remain invested. Because investors generally aren’t paying annual taxes on interest, dividends, or realized gains inside these accounts, they may be appropriate locations for certain income-producing or higher-turnover investments.

But tax deferral often is only part of the bigger picture. Withdrawals from traditional retirement accounts are generally taxable, and required minimum distributions (RMDs) may eventually create income whether or not you need the money for spending.

Roth Accounts: Often the Longest Time Horizon

I generally think of Roth assets as some of the last dollars a client might use.

Qualified Roth IRA distributions can be tax-free, and Roth IRAs do not require lifetime distributions for the original owner. For some clients, that creates a longer potential investment horizon.

Depending on the client’s risk tolerance and overall portfolio, we may therefore consider placing investments with greater growth potential in a Roth account.

Where Investors May Run into Trouble with Asset Location Choices

An investment may fit well within a portfolio but still create unnecessary tax consequences if it is held in the wrong type of account. Here are some of the more common missteps I see investors make.

Holding Target Date Funds in a Taxable Account

One of the biggest asset location issues I’ve seen with do-it-yourself investors is holding target date funds in taxable accounts.

Target date funds can be useful inside retirement accounts. They automatically rebalance and generally reduce stock exposure as the target retirement date approaches. It’s a convenient, hands-off solution.

However, the trades from rebalancing can create capital gains distributions. Inside a retirement account, those transactions generally don’t create an immediate tax bill. In a taxable account, they can, even if the investor didn’t personally sell any shares.

MLPs and REITs in a Taxable Account

Master limited partnerships (MLPs) and real estate investment trusts (REITs) can also create complications in taxable accounts. MLPs generate K-1 forms, which can force filing extensions and add complexity to a client's tax return. Both MLPs and REITs produce income distributions that are taxed annually in a taxable account. When held in a retirement account, those distributions grow without triggering annual taxes. There is less administrative hassle, fewer tax events, and more growth potential.

Of course, you can only work with the accounts available to you. Asset location isn’t about creating a theoretically ideal portfolio at all costs. It’s about making the best possible choices with what you have.

Underutilizing a Roth Account

Some investors hold all fixed income or a very low stock allocation in their Roth accounts. Given the Roth's tax-free growth and typically long time horizon, this can represent a missed opportunity. These accounts are often best positioned for growth-oriented investments that stand to benefit most from compounding without a tax drag.

That doesn’t mean every Roth should be aggressively invested. Risk tolerance, liquidity needs, and the rest of the portfolio still matter. The point is to consider the Roth’s role within the total plan rather than investing it in isolation.

How Asset Location Strategy May Shift Across Life Stages

Asset location isn’t static. The way we use different accounts can change as an investor moves from saving and accumulating assets to drawing income from them.

Early and Mid-Career

Earlier in your career, the priority can often be straightforward: save as much as reasonably possible in the accounts available to you.

Building savings across different account types, including pre-tax, Roth, and taxable accounts, can also give you more flexibility later when asset location becomes more important. As retirement gets closer, we can begin evaluating how those accounts should be invested and how each one may eventually provide income.

Approaching Retirement

This is where asset location can become especially important. As retirement draws closer, we work closely with clients to evaluate the full picture of their income sources and account structure. Specific areas of focus include:

• Roth conversion opportunities — moving traditional IRA assets into Roth accounts, particularly during lower-income years before RMDs and Social Security begin
• Medicare premium impact (IRMAA) — understanding how interest, dividends, capital gains, and IRA distributions may push a client over Medicare income thresholds and trigger higher premiums
• Projected required minimum distributions — modeling how RMDs from IRA accounts will affect future tax brackets
• Other income sources — factoring in pensions, Social Security, and other income streams alongside portfolio withdrawals

The Pre-RMD Window: A Key Planning Opportunity

The years between retirement and the start of required minimum distributions can represent one of the most meaningful planning windows for asset location decisions. During this period, income is often lower than it was during peak earning years — and lower than it may be once RMDs begin.

That potentially creates an opportunity. It may make sense to pay slightly more in taxes during those early retirement years through Roth conversions or strategic withdrawals instead of deferring everything and potentially facing a higher tax bracket once the IRS requires distributions.

The goal is to spread the tax impact across a wider timeframe rather than concentrating it in later years. Asset location decisions made during this window can shape the tax picture for years to come, which is why we look at the full distribution timeline rather than any single tax year in isolation. 

During Retirement

Once a client is in full distribution mode, asset location often continues to evolve. In some situations, we may hold more fixed income in a traditional IRA while keeping more equities in taxable accounts, where gains on investments held longer than one year may receive long-term capital gains treatment when realized.

Charitable giving strategies can also play a role here. Once a client reaches age 70½, qualified charitable distributions (QCDs) allow funds to go directly from an IRA to a qualified charity. The distribution counts toward an RMD obligation but is not counted as taxable income, which can be a meaningful tool for clients who might otherwise be pushed into higher brackets.

For some clients, a QCD may produce a better tax outcome than donating appreciated stock from a taxable account. The advisor's role is to evaluate both options and determine what makes the most sense for the client's overall situation.

The Role of a Financial Advisor in Asset Location Planning

Asset location planning involves ongoing decisions that touch investments, taxes, and long-term projections simultaneously. A financial advisor can bring structure and perspective to that process in a few important ways.

Looking Beyond This Year’s Tax Bill

CPAs and individual investors tend to think about taxes for the current year, or maybe one year ahead. That's a natural and necessary perspective, but it can leave longer-term opportunities on the table. Some CPAs may be hesitant to suggest paying slightly more taxes now, even when the long-term benefit could be meaningful.

As a financial advisor, I take a long-term view. The strategy that produces the lowest tax bill this year isn't always the one that makes the most sense over an entire retirement. At EP Wealth, we use planning software to project income, portfolio growth, and tax impact over a decade or more. That longer horizon can surface opportunities that a year-by-year approach might miss, such as Roth conversions during low-income years, or pre-RMD withdrawal strategies.

Medicare is part of the conversation as well. Some clients are surprised by how much they may owe in Medicare premiums in retirement, simply because of how much income flows in from multiple sources. A longer planning horizon can help anticipate and address those situations before they arrive.

Coordinating Across a Team

Asset location draws on multiple areas of financial planning. At EP Wealth, the advisor works alongside a financial planner who dives into tax analysis and a portfolio management team that helps evaluate and implement the investment strategy across accounts. The client gets the benefit of those perspectives working together rather than in separate silos.

Total Portfolio Management vs. the DIY Approach

A DIY investor may apply the same allocation to every account. While that can produce the desired investment mix overall, it can miss opportunities to place investments more strategically based on the tax treatment and time horizon of each account.

When I work with clients, we start with the target allocation for the overall portfolio, then adjust the holdings within each account to manage tax impact while keeping the desired mix intact.

If a trust contains highly appreciated stocks, for example, selling them simply to make that account fit a standard allocation could create a significant tax consequence. Instead, we may build around those holdings and adjust the IRA, Roth, or other accounts accordingly.

Asset location rarely comes down to a universal formula. The goal is to make the best use of the accounts and investments available to you, while weighing the tradeoffs across the entire portfolio.

EP Wealth financial advisors can help you evaluate asset location alongside your investment strategy, retirement income, and broader financial plan. Learn more about EP Wealth’s investment management and financial planning services or connect with a financial advisor to discuss your portfolio. 

DISCLOSURES

• Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
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• Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice
• The content of this report is believed to be accurate as of the date of publication and cannot and does not accurately forecast future economic, market, or financial conditions, including changes to retirement benefits, social security, and/or Medicare. For this reason, any subsequent changes, and/or that occur after the publication of this presentation may cause the analysis encompassed herein to become inaccurate. Any references to future market or economic forecasts are based on hypothetical assumptions that may never come to pass.
• Tax matters can be complicated. All tax references are general in nature and are not intended to supersede professional advice. Please consult with an accountant and/or attorney before implementing any of the strategies discussed. EP Wealth Advisors is not engaged in the practice of law or accounting.