Tool · Optimization

Asset Location Architect

A dollar of bonds in a taxable brokerage account generates ordinary-income yield taxed every year. The same dollar in a Roth IRA compounds tax-free forever. Multiply that across a decade and you get the location alpha — 15 to 75 basis points per year, in after-tax dollars, for identical assets and identical asset allocation.

Bergstresser & Poterba (2004)· Dammon·Spatt·Zhang (2004)· Vanguard asset location studies · By RothIRAHub Editorial · Updated 2026-04-19 · Editorial reference content

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Step 1

Your portfolio sleeves

Enter percent allocation to each asset class across all your accounts combined. Must total 100%.

Total

Step 2

Account balances

Total dollars in each tax wrapper. Group any workplace plan with IRAs of the same tax treatment.

Roth IRA + Roth 401(k)

Traditional IRA + 401(k) + 403(b)

Taxable brokerage

Total portfolio

Step 3

Tax context

Marginal rates applied to yearly yield while held in taxable.

Federal ordinary income rate Applies to bond interest, REIT dividends, short-term gains. Federal LTCG & qualified-div rate Applies to qualified dividends and long-term realized gains. State rate on ordinary income (%)

Time horizon (years)

For projecting the compounded impact.

Your location alpha

Annual tax drag saved

bps of portfolio

-year compounded value

reinvested at 5%/yr tax-deferred

Portfolio surface area

% in Roth · % in Trad · % in taxable

No meaningful drag to relocate. Either your allocation has no tax-inefficient sleeves, or all your money is already in tax-advantaged accounts. The location-alpha problem is moot for you.

Allocation doesn't sum to 100% (%). Adjust sleeves above to see accurate recommendations.

Optimal placement

The algorithm fills each account type in tax-efficiency priority: Roth IRA captures highest-expected-return assets (the most lifetime tax-free growth); Traditional takes tax-inefficient yield (protecting it from annual ordinary-income drag); taxable holds what's left — ideally broad equity index funds that compound into LTCG.

Roth IRA

(Empty — no Roth balance)

Traditional IRA / 401(k)

(Empty — no Traditional balance)

Taxable brokerage

(Empty — no taxable balance)

Each sleeve's tax profile

"Drag in taxable" is the annual after-tax haircut for holding this sleeve in a brokerage account — ordinary-yield × ordinary rate plus qualified-yield × LTCG rate. "Tax-free desirability" scores how much this sleeve benefits from Roth placement (high-expected-return sleeves gain the most from decades of tax-free compounding).

Sleeve	Expected return	Ord-income yield	Qualified yield	Drag in taxable	Best home

Methodology & citations

Why asset location produces after-tax alpha

Identical dollars in identical assets accrue different after-tax returns depending on which tax wrapper they live in. In a Roth IRA, distributions (including growth) are tax-free forever. In a Traditional IRA or 401(k), growth is deferred but eventually taxed at ordinary rates. In a taxable brokerage, every year's bond interest and REIT distribution is taxed as ordinary income, while qualified dividends and long-term gains enjoy preferential rates.

This creates a pecking order. If you hold a $100,000 bond fund yielding 4% in your taxable brokerage at a 32% ordinary rate, you pay $1,280 in taxes every year. Move the same fund into your Traditional IRA: the government collects tax only when you eventually withdraw, so the drag goes to zero for the holding period. Move it into a Roth: zero tax forever. The dollar difference over a 30-year horizon runs into the tens of thousands for a portfolio of moderate size.

Bergstresser and Poterba (NBER WP 9268, 2004) estimated typical asset-location alpha at 20 basis points/year across the US household universe. Dammon, Spatt & Zhang (Journal of Finance, 2004) modeled 50–100 bps for high-marginal-rate households. Vanguard's Advisor's Alpha research (2014, 2021) put the spread at 15–75 bps depending on tax-rate assumptions and portfolio composition.

How this tool's algorithm decides the placement

For each sleeve we compute two numbers:

drag_in_taxable = ord_yield × (ord_rate + state_rate) + qual_yield × (ltcg_rate + state_rate) tax-free-desirability = expected_return − ord_yield × (ord_rate + state_rate)

Then we fill accounts with a simple priority:

Roth IRA gets the sleeves with highest tax-free desirability first — typically equity-heavy, growth-oriented assets whose total return is maximized when decades of compounding go untaxed.
Traditional IRA / 401(k) gets the sleeves with highest drag-in-taxable next — tax-inefficient yield (bonds, REITs, TIPS) is sheltered from annual ordinary-income friction.
Taxable brokerage gets what's left — ideally broad-market equity index funds with low yield and predominantly long-term qualified gains, which compound into LTCG-preferenced wealth and enjoy a step-up in basis at death.

The tool respects your account sizes as hard constraints: if your Roth is only $30k, it can only hold up to $30k of whatever the best-fit sleeve is. Any leftover spills to the next-priority account.

Caveats and real-world frictions

This is a model — a decision-aid, not a verdict. Several things it deliberately ignores:

Rebalancing friction. Moving sleeves into their optimal homes requires selling in taxable, which can trigger capital gains. If you have embedded gains, factor the one-time tax cost against the ongoing drag savings.
Foreign tax credit. International equity funds often pay foreign withholding tax; the US Foreign Tax Credit is only claimable on returns in taxable accounts. This slightly pulls international stocks toward taxable.
TIPS phantom income. Treasury Inflation-Protected Securities accrue taxable phantom income each year even when no cash is received — particularly punishing in taxable accounts, particularly good in Roth or Traditional.
Rate uncertainty. The tool uses your current marginal rate; if your retirement rate will be materially different from today's, the Traditional-vs-Roth trade-off shifts (see our Roth vs. Traditional Comparator).
Withdrawal sequencing. Some strategies favor drawing taxable first (letting Roth compound longest); others favor Roth-conversion ladders in early retirement. The optimal location interacts with the optimal withdrawal order.
Step-up at death. Taxable appreciation is wiped out if assets are held until death (stepped-up basis under IRC §1014). If your estate plan assumes this, equity in taxable becomes even more attractive than the tool suggests.

Default yield & return assumptions

These are the built-in defaults for each sleeve — edit or ignore them at will. They reflect long-term averages as of 2025.

US total stock market. Expected return 8%, ord yield 0% (qualified dividends only), qual yield 1.3%.
International developed. Expected return 7.5%, ord yield 0%, qual yield 2.5% (foreign tax credit available in taxable).
Emerging markets. Expected return 8.5%, ord yield 0%, qual yield 2.3%.
US bonds (aggregate). Expected return 4.5%, ord yield 4.2%, qual yield 0%. This is the classic "put in tax-deferred" sleeve.
TIPS. Expected return 4%, ord yield 3.8%, qual yield 0%. Phantom-income worst-in-taxable.
REITs. Expected return 8%, ord yield 4% (non-qualified), qual yield 0%. High ordinary-income drag; powerful in Roth.
Cash/Money market. Expected return 4.5%, ord yield 4.5%, qual yield 0%.

Yields drift with interest-rate cycles. For planning, the relative drag between sleeves matters more than the exact absolute numbers.

Sources & academic literature

Bergstresser, D., & Poterba, J. (2004). "Asset Allocation and Asset Location: Household Evidence from the Survey of Consumer Finances." Journal of Public Economics, 88(9-10). NBER Working Paper 9268.
Dammon, R., Spatt, C., & Zhang, H. (2004). "Optimal Asset Location and Allocation with Taxable and Tax-Deferred Investing." Journal of Finance, 59(3).
Shoven, J. B., & Sialm, C. (2004). "Asset Location in Tax-Deferred and Conventional Savings Accounts." Journal of Public Economics, 88(1-2), 23-38 (NBER WP 7192, 1999).
Vanguard (2014, 2021). "Asset Location for Taxable Investors." Research notes on Vanguard Advisor's Alpha.
Kitces, M. (2014–ongoing). Multi-part series on asset location vs. asset allocation, Nerd's Eye View.
IRC §1(h) — capital gains tax rate schedule
IRC §163 — investment interest deduction mechanics
IRS Publication 550 — investment income and expenses (taxation of dividends and interest)

User Guide

How to use the Asset Location Architect

This tool optimizes which investments belong in your Roth, Traditional, and taxable accounts. Enter your balances and your target overall allocation; the tool returns a specific placement map that maximizes after-tax expected return by ranking each sleeve on expected return minus tax drag. The output is the dollar savings per year versus a naive even-placement baseline, plus the projected compounded gain over your horizon.

Asset location is one of the few retirement-planning levers that produces genuine alpha — typically 15–60 basis points per year — without taking on additional risk. The logic: identical investments accrue different after-tax returns depending on which tax wrapper they live in. Bonds and REITs bleed badly in taxable because their distributions are taxed as ordinary income every year. Tax-efficient stock index funds barely notice taxable treatment. Getting the placement right compounds over decades.

The intuition behind location

A share of a total-stock-market index fund held in a taxable account, a Traditional IRA, and a Roth IRA looks identical on a fund sheet. It isn't, economically. The taxable share pays dividend and capital-gains tax annually. The Traditional share defers all tax until withdrawal, then pays ordinary income rates on everything. The Roth share pays no tax, ever, provided it's qualified at withdrawal. Over 30 years these differences compound into two-digit-percent gaps in terminal wealth.

The right placement strategy ranks each asset class on expected return minus tax drag in the candidate wrapper, then assigns the highest-ranked sleeves to the most tax-advantaged accounts. For most households that works out to: bonds and REITs in Traditional or Roth; US stock index in taxable (low drag due to qualified dividends and long-term cap gains); international stock in taxable where the foreign tax credit is available; and the highest-expected-return sleeve (typically small-cap value or emerging markets) in Roth where the unlimited upside is protected.

Who should use this tool

Anyone with balances across at least two account types — Roth plus Traditional, or Roth plus taxable, or all three. The benefit scales with total portfolio size and with the tax rate you'd pay on ordinary distributions, so it matters most for six-figure-plus investors in the 24 % bracket or higher. For smaller balances or lower brackets, optimal location is still worth doing but the dollar impact is smaller.

It's also valuable for anyone rebalancing after a major life event — a retirement, a move to a new state, an inheritance, a large bonus deposited into taxable. These events often create imbalance across your wrappers that the tool can rationalize.

Walking through the inputs

Account balances. Current Roth, Traditional, and taxable totals. Include 401(k) with Traditional; include Roth 401(k) with Roth. HSAs, if invested for retirement, should be added to the Roth column because their tax treatment (tax-free growth, tax-free qualified withdrawal) matches a Roth.

Target allocation percentages. How much of the total portfolio you want in each sleeve (US stocks, international stocks, bonds, REITs, emerging markets, small-cap, etc.). This is your strategic asset allocation, independent of location.

Your marginal ordinary rate and long-term capital-gains rate. Drives the drag computation for each sleeve in taxable. Use your actual federal rates, not the headline bracket.

State tax rate (optional). Additive to the federal rates for taxable-account drag. In a 13 % state like California, the tax drag on taxable bonds is materially higher than in a no-income-tax state.

Expected returns per sleeve. The tool ships with reasonable defaults (5 % real for US stock, 2 % real for bonds, etc.) but you can override.

How to read the result

The tool returns a placement map showing what fraction of each sleeve goes into each account. High-drag sleeves (bonds, REITs, high-yield corporate bonds, TIPS) land in Traditional or Roth. Low-drag sleeves (tax-efficient US stock indexes) land in taxable. Highest-expected-return sleeves claim Roth first when capacity allows. The dollar output is the per-year and compounded savings versus naive even-placement across accounts.

The tool also flags the "efficient frontier" of location decisions — the top three or four moves that would produce the largest dollar gain. In practice, 80 % of the gain from location comes from two decisions: (1) holding bonds in tax-deferred, not taxable; and (2) holding the highest-expected-return equity sleeve in Roth. The rest is diminishing returns.

Common mistakes this tool prevents

Putting bonds in taxable for "safety." The safety argument is about portfolio volatility, not about which account holds the bonds. Keep the bond allocation at your target percentage; just hold it in the IRA.
Holding the same fund across all three account types. That's a location miss — each wrapper has different optimal sleeves. Same total portfolio, different contents per account.
Using drag alone to rank. Correct ranking is expected return minus drag, not drag alone. When Roth space is scarce, the highest-return sleeves earn it even if their drag isn't the worst. Bonds have tiny drag in absolute terms; emerging-market stocks have larger drag but larger expected returns too.
Forgetting international equities and the foreign tax credit. The foreign tax credit is only available in taxable; placing international stocks in an IRA forfeits it, which can be 10–20 bps per year.
Rebalancing by selling in taxable. Rebalance by directing new contributions to the under-weighted sleeve, not by selling existing positions that would trigger capital gains.
Ignoring the Roth's scarcity premium. Roth space is more valuable than Traditional space because withdrawals are tax-free rather than tax-deferred. Assign highest-conviction and highest-expected-return sleeves there first.
Keeping cash in Roth. Cash throws off taxable interest, but it also barely grows. A money-market sleeve in Roth wastes the Roth's scarce compounding protection. Keep cash in taxable or a high-yield savings; keep Roth full of growth assets.

After you have the map

Rebalance toward the target placement over time by directing new contributions, not by selling existing holdings in taxable (which would trigger capital gains). In a Roth or Traditional you can rebalance freely without tax friction.

Re-check the location every year or after any major event. The optimal map shifts when your balances grow, your tax rates change, or you pivot sleeves (for instance, adding a factor tilt or increasing international exposure). The Asset Placement pillar covers the logic and the tool's algorithm in depth, including worked examples for a $500K portfolio split across all three account types.