Tax Considerations for Investment Allocations

The kind of account you use, whether an IRA, Roth IRA, 401(k) or taxable brokerage account, affects when and how much tax you pay on your investment returns. This article covers which investments belong in which accounts, a strategy often called asset location.

Your overall allocation stays the same either way. Asset location only changes where each piece lives, so that less of your return goes to taxes.

Which investments to shelter

There are two main reasons to hold an investment in a tax-advantaged account instead of a taxable one:

1. It pays out a lot of income, such as interest or dividends.
2. It's actively managed and generates frequent short-term capital gains from holdings sold within a year.

Here's how the tax rates compare for 2026:

Bonds

Bonds are the classic example. Most of their return comes from interest payments, which are taxed as ordinary income at rates up to 37%. Holding them in a tax-advantaged account like a traditional IRA or 401(k) avoids that yearly tax bill and lets the interest compound.

Two exceptions: municipal bonds are already free of federal income tax, so they belong in a taxable account if you hold them at all. U.S. Treasury interest is exempt from state income tax, which makes Treasuries a little less costly to hold in a taxable account than corporate bonds.

High-dividend stock funds and REITs

Stock funds that pay large dividends can also be better off in a tax-advantaged account. Qualified dividends get the lower 0–20% rate, but non-qualified dividends are taxed as ordinary income. Real estate investment trusts (REITs) are the biggest example: most of their dividends are non-qualified, so they're usually a strong fit for a tax-advantaged account.

Actively managed funds

Actively managed funds buy and sell often, which tends to create short-term capital gains that are taxed as ordinary income. In a tax-advantaged account, that turnover doesn't cost you anything in taxes.

What works well in a taxable account

Broad stock index funds and ETFs are usually the most tax-efficient investments. They trade rarely, most of their dividends are qualified, and most of their return comes from growth you aren't taxed on until you sell. International stock funds have an extra advantage in a taxable account: you can usually claim a credit for foreign taxes they pay, which you lose inside an IRA.

Roth IRAs

Roth IRAs are unique because qualified withdrawals are completely tax-free. You contribute money you've already paid tax on, and everything it earns can come out tax-free in retirement.

That makes a Roth a good home for your highest-growth investments, such as U.S. and international stocks. The more an investment grows, the more tax-free money you build. To keep your overall allocation on target, you can then hold more of your bonds and income investments in a traditional IRA or 401(k).

Putting it together

A common starting point for where each type of investment goes:

This is a starting point, not a rule. Your tax bracket, account sizes and the funds available in your 401(k) all matter. Bogleheads.org has a detailed guide to tax-efficient fund placement.

Keeping it balanced

Once your investments are spread across accounts for tax reasons, keeping the overall mix on target gets harder. Rebalancing in a taxable account can trigger capital gains, while trades inside IRAs and 401(k)s don't. That's exactly what the Loot Lasso calculator is built for: it sells only inside your tax-advantaged accounts and uses new money in taxable accounts to buy what's underweight.