Every few years someone declares asset location “over” because ETFs got more tax efficient or because a single backtest favors one layout over another. Then tax season rolls around and you’re reminded that location isn’t a magic trick, it’s just a quiet way to let compounding keep more of what it earns. Not a headline. More like good lighting. You notice it most when it is missing.
I like to keep the conversation simple. Three buckets, three jobs, and enough humility to admit the edges are fuzzy.
Taxable is the flexible bucket. Dividends and realized gains show up on a 1099, but you can harvest losses when markets wobble, gift appreciated shares, and heirs may get a step up in basis. It is the sleeve you can tap without paperwork gymnastics.
Tax deferred is the income bucket. You defer taxes today and accept ordinary income later, often when required distributions arrive. It can absorb the stuff that would otherwise drip income into a tax return every year.
Roth is the patience bucket. Qualified withdrawals are tax free, which makes it a natural home for assets you expect to compound quietly for a long time.
That framing is enough for most clients. It trades precision for clarity, which is usually the right trade.
If you do nothing else, matching the character of the income to the character of the account gets you most of the benefit.
Income that looks like a paycheck often belongs in tax deferred. Core bonds, TIPS funds, REIT funds, and strategies with lots of short term gains feel less noisy there. Broad equity indexes often live happily in taxable because they are efficient, easy to harvest, and easy to gift. The highest expected growth tends to earn Roth space because that is where compounding keeps the most.
These are tendencies, not commandments. When you say “usually” out loud, clients relax and you leave room to adapt.
International equity can be good in taxable, but not always. Structure and bracket matter more than slogans. Municipal bonds can make sense in taxable, but only when the after tax math actually wins for the person in front of you. A tax aware active manager may sit fine in taxable. A high turnover strategy probably does not. Loading every bond into pre tax might look optimal today and awkward at age 73 if distributions swell. Gifting habits, charitable projects, and who is likely to inherit what can tilt the map as much as any spreadsheet.
The point isn’t to outsmart the code. It is to reduce the friction the code creates without painting yourself into a corner.
Eva and Mark are in their mid 50s with money in a brokerage account, a traditional IRA, and two small Roth IRAs. We do not rebuild their portfolio. We let cash flows nudge most of the bond sleeve and a small REIT fund into the IRA. Taxable carries total market and international index funds. The Roths hold a small and mid cap tilt they are comfortable ignoring for a decade. Their annual tax packets get quieter. The Roths get a cleaner runway. No victory lap, just fewer distractions.
A widow in her late 60s holds most of her wealth in a traditional IRA and gives to charity every year. We keep fixed income largely in pre tax, but we also stage measured conversions to Roth in the early retirement years so future distributions do not crowd her tax brackets. Taxable holds broad equity ETFs and a few legacy winners earmarked for gifts over several years. When the market offers losses, we harvest and reset. The gifts refresh basis without realizing gains. Nothing heroic, just tidier cash flows.
Location is not a one and done choice. Brackets move. Spending needs shift. A new employer plan shows up. A large gift appears on the horizon. Each of those can nudge you to revisit placement. I like a short note in the file that says what lives where and why, plus two conditions that would trigger a rethink. Future you will thank present you.
When you finish an allocation refresh, ask three questions. Will the client understand it in a minute. Will they tolerate the maintenance it actually needs. Does the after tax outcome improve without creating a future spike you will just have to unwind. If those feel like yes, the location probably works, even if a model suggests you left a few basis points on the table.
Asset location is not about cleverness. It is about being kind to compounding and kind to the person who has to live with the plan. Most years that looks like small decisions you hardly notice. Which is exactly the point.