How Tax-Efficient Retirement Investing Can Save You Thousands
If you’ve spent decades building a six or seven-figure portfolio, you’ve probably given a lot of thought to what you’re investing in. That’s natural. But there’s a separate question that tends to get far less attention, and it can cost you tens of thousands of dollars over a retirement lifetime if it goes unaddressed.
The question is where your investments are sitting, not just what they are.
This is called asset location, and in my experience working with pre-retirees and retirees managing $1 million or more, it’s one of the most underused tax planning tools available. Most people know about asset allocation, which is how you divide money between stocks, bonds, and other asset classes. Asset location is the next layer. It asks which account type holds which investments, and getting that placement right often matters more for your long-term tax bill than the specific funds you choose.
Let me walk you through how this works, why it matters for tax-efficient retirement investing, and how to think about it for your own situation.
Why Account Type Changes Everything
The U.S. tax code doesn’t treat all accounts the same way. A traditional IRA and 401(k) grow tax-deferred, meaning you’ll pay ordinary income taxes when you eventually take money out in retirement. Roth IRA’s grow tax-free, with no taxes owed on qualified withdrawals. Taxable brokerage accounts works differently from both. Dividends and interest earned there are taxed every year as they come in, and capital gains are taxed when you sell a position.
Now layer on the fact that different investments are taxed very differently too. Bond interest is taxed at ordinary income rates, which can run as high as 37%. Long-term capital gains from index funds are taxed at 0%, 15%, or 20% depending on your income level. REITs, or Real Estate Investment Trusts, are required by law to distribute at least 90% of their taxable income to shareholders, and those distributions are almost always taxed as ordinary income.
When you put all of that together, placement starts to matter in a big way. Holding a bond fund in a taxable brokerage account means you’re paying ordinary income rates on that interest every year, whether you need the cash or not. Over a 20 or 30-year retirement, that tax drag builds up. A lot of clients I work with don’t realize how much it’s costing them until we actually run the numbers side by side.
From a fiduciary perspective, thinking through account placement is one of the most concrete ways I can help clients hold onto more of what they’ve earned.
A Practical Framework for Asset Location
A clear way to think about asset location is to sort your investments into three categories based on how the IRS treats them.
Tax-inefficient investments belong in your traditional IRA or 401(k). This means bonds, bond funds, and REITs. These generate ordinary income, so holding them inside a tax-deferred account shields you from paying that bill every year. You’ll still owe taxes when you withdraw in retirement, but you control the timing, which opens up real planning opportunities.
Your highest-growth investments belong in your Roth IRA. Think large cap and small-cap growth stocks, and anything with serious long-term appreciation potential. Every dollar of growth inside a Roth comes out completely tax-free in retirement. If an aggressive growth fund triples over the next 20 years inside a Roth, you owe nothing on those gains when you withdraw. That’s a powerful outcome.
Putting conservative, low-return investments in a Roth wastes one of the best tax-free vehicles available to American investors, and I see this mistake more than you might expect.
Tax-efficient investments belong in your taxable brokerage account. Broad-market index funds and total stock market funds work well here because they have very low turnover and don’t generate many taxable distributions throughout the year.
When you do eventually sell after holding for more than a year, you’ll pay long-term capital gains rates, which are substantially lower than ordinary income rates for most retirees.
Seeing It in Action
Let’s say you have a $600,000 portfolio and you want to maintain an 80% stock, 20% bond allocation. That’s $480,000 in equities and $120,000 in bonds. Here’s how asset location plays out.
Your traditional IRA and 401(k) hold $200,000, and all your bonds, REITs and other tax in-efficient funds go here. Next, your Roth IRA has $100,000 and that’s reserved entirely for your most aggressive growth investments, small-cap value funds, emerging markets, anything with the highest long-term growth potential. Your taxable brokerage account holds $300,000 in broad-market index funds.
Overall, your portfolio is still 80% stocks and 20% bonds. The allocation didn’t change at all. But now every investment is sitting in the account type that minimizes your lifetime tax bill. Small adjustments in placement can add up to substantial savings over a long retirement.
This example is hypothetical and for illustration purposes only. Individual results will vary based on your specific situation, account balances, and tax circumstances.
The Tax-Loss Harvesting Benefit
One often-overlooked reason to keep index funds in your taxable account is the ability to tax-loss harvest. When the market drops and a fund is down, you can sell it, capture that loss to offset realized gains or up to $3,000 of ordinary income, and immediately buy a similar fund to stay invested. You haven’t changed your investment strategy, but you’ve created a real tax benefit.
This strategy only works in taxable accounts. You can’t use it inside an IRA or 401(k), those accounts don’t allow for it. In my experience working with clients, this is one of the more practical and underappreciated advantages of maintaining a well-structured taxable brokerage account alongside your retirement accounts. A lot of people treat their brokerage account as an afterthought. Structured properly, it becomes a valuable part of a broader tax plan.
Estate Planning: The Step-Up in Basis
There’s another layer to asset location that often surprises people when they first hear it. Assets held in a taxable brokerage account receive what’s called a step-up in cost basis at death. Your heirs inherit those assets valued at the fair market value on the date of your passing, which means they can sell them with little to no capital gains tax owed.
That changes the estate planning math considerably. For clients who have assets they don’t expect to spend during retirement and plan to pass on to family, keeping appreciated assets in a taxable account can actually be a smart long-term move. It feels counterintuitive when you’re focused on minimizing taxes during your lifetime, but from a fiduciary perspective, this is exactly the kind of detail that gets missed without a coordinated plan across all your account types.
Common Mistakes With Six & Seven-Figure Portfolios
After working with pre-retirees and retirees for years, a few patterns come up again and again.
The most common one is holding high-dividend stocks or actively managed funds in a taxable account. Those investments generate distributions that are taxed as ordinary income every year, often without the investor paying close attention to the accumulating tax impact. Repositioning them into a tax-deferred account would remove that annual drag.
Another pattern is filling a Roth IRA with conservative investments like bond funds. I’ve seen this frequently. The reasoning usually involves wanting the Roth to feel safe and steady. A Roth IRA is your single best tax-free growth vehicle. Filling it with low-return assets is a missed opportunity that compounds over decades in the wrong direction.
A third mistake is treating each account in isolation rather than looking at the full picture. Asset location only makes sense when you’re thinking about your entire portfolio across every account type at once. If you’re managing your IRA separately from your brokerage account and Roth without a unified view, you’re likely missing opportunities that aren’t obvious until someone maps it all out together.
This Isn’t a Set-It-and-Forget-It Strategy
Tax laws change. Portfolio balances shift over time. Your retirement income needs and timeline evolve as you get closer to and move through retirement. Asset location needs to be revisited regularly, not set up once and left alone for years.
This is one of the reasons I put together a full video walking through this strategy in depth, with specific examples of how investors at different stages should think about their account structure. If you’d like to go deeper on the mechanics, you can watch it here.
Watch: Asset Location Strategy for Six-Figure Portfolios
Final Thoughts
With the right planning approach, it’s possible to significantly reduce the taxes you pay throughout retirement.
If you’d like help creating a retirement tax strategy tailored to your situation, working with a qualified financial planner can help you identify opportunities and avoid costly mistakes.
At Eagle Financial Planning, we help pre-retirees create clear strategies for retirement income, tax planning, and long-term financial security.
You can schedule a complimentary Retirement Strategy Session to explore what’s possible for your retirement plan.
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This content is for educational purposes only and does not constitute personalized financial advice. Tax laws are subject to change. Please consult a qualified financial planner and tax professional before making any investment decisions based on your specific circumstances.
