When most people think about investing, the first thing that comes to mind is asset allocation—the mix of stocks, bonds, and other investments in their portfolio. And that’s important. But what often gets overlooked—and can make an even bigger difference in retirement—is asset location.
Asset location is all about strategically placing certain investments in certain accounts to minimize taxes and maximize after-tax returns. Done correctly, it’s one of the easiest ways to improve your financial outcome without taking on any more risk. Done incorrectly, it can lead to paying far more in taxes than necessary.
Two Types of Taxes That Matter
Before we can understand why asset location is so valuable, we have to review the two primary types of taxes retirees face:
- Ordinary Income Tax – This is the standard tax most people think of. In 2025, federal tax brackets range from 10% to 37%. Income from wages, pensions, Social Security (depending on your situation), and withdrawals from traditional retirement accounts (TSP, IRA, 401k) all fall under ordinary income tax.
- Long-Term Capital Gains Tax – These taxes apply when you sell an investment you’ve held for more than a year. Rates are either 0%, 15%, or 20% depending on your income. In almost all cases, capital gains taxes are lower than ordinary income taxes.
And of course, our favorite tax is no tax at all, which is possible with Roth accounts. We’ll get there in a moment.
Why Asset Location Matters
Different accounts have different tax treatments:
- Pre-tax accounts (Traditional TSP, Traditional IRA, 401k) – Tax-deferred now, taxed later as ordinary income.
- Taxable accounts (brokerage accounts, joint investment accounts) – Taxed every year as gains, dividends, or interest occur.
- Roth accounts (Roth TSP, Roth IRA, Roth 401k) – Contributions are after-tax, but growth and withdrawals are 100% tax-free.
Here’s the problem: most retirees spread their investments evenly across accounts without considering where those investments should live. But think about it—why would you want your fastest-growing investments sitting in the account that’s taxed at the highest rate when you withdraw? That’s where asset location comes in.
Best Investments for Pre-Tax Accounts
Every dollar withdrawn from a Traditional TSP, IRA, or 401k is taxed as ordinary income. Since ordinary income tax rates are the highest, the smart move is to place some in the conservative, slower-growing investments. This doesn’t mean that you should make all your traditional investments conservative. If you’re curious how much you should put, check out our articles on finding a balance here.
Why? Because the less growth that occurs in these accounts, the less money will eventually be exposed to high tax rates.
Examples:
- Bond funds
- G Fund or F Fund in the TSP
- Other low-growth, income-focused investments
By keeping growth modest here, you minimize how much ends up being taxed at potentially 22%, 24%, or even higher.
Best Investments for Taxable Accounts
Taxable brokerage accounts are unique because you pay taxes as income and gains occur. Dividends generate tax bills—even if you reinvest them.
But the silver lining is that long-term capital gains are usually taxed at much lower rates than ordinary income. That means taxable accounts are best suited for growth-oriented investments that don’t generate a lot of taxable events each year.
Examples:
- Growth stocks or funds that don’t pay high dividends
- Index funds or ETFs with low turnover
- Individual stocks you intend to hold long-term
By focusing on growth-oriented investments, you can defer most taxes until you sell—at which point you’ll likely pay long-term capital gains rates (often just 15%, or possibly 0% depending on your income).
What you generally want to avoid in taxable accounts:
- Bonds (since interest is taxed at ordinary income rates)
- High-dividend stocks or funds (since dividends create taxable income every year)
Best Investments for Roth Accounts
Roth accounts are the crown jewel of retirement planning because money grows tax-free and withdrawals are tax-free. For this reason, Roth accounts are the ideal place to put your most aggressive, high-growth investments.
Examples:
- Stock funds like the C Fund, S Fund, or I Fund in the TSP
- Emerging markets or growth-oriented funds
- Individual stocks with strong growth potential
Think about it: wouldn’t you rather have the account with the most growth also be the one that you’ll never pay taxes on? By putting your aggressive investments here, you maximize the long-term benefit of the Roth’s tax-free treatment.
The Problem with the TSP
Federal employees face a challenge here: the TSP doesn’t allow you to separate your investment strategy between the Traditional and Roth sides. Both are invested the same way.
That means if you want true control over asset location, many retirees choose to roll their TSP into a Traditional IRA and a Roth IRA. With IRAs, you can control investments independently and take full advantage of asset location strategies.
This small shift can add up to hundreds of thousands of dollars in additional after-tax wealth over the course of retirement.
A Quick Example
Let’s say you have $500,000 in a Traditional TSP and $500,000 in a Roth TSP. You plan to invest half your money conservatively and half aggressively.
- If you put the conservative half in the Roth and the aggressive half in the Traditional, much of your growth will eventually be taxed at high ordinary income rates.
- If you flip it—putting conservative assets in the Traditional and aggressive assets in the Roth—you’ll still get the same overall portfolio risk, but now your growth is occurring in the tax-free account.
Over a 20–30 year retirement, this simple shift could be the difference between keeping or losing six figures to unnecessary taxes.
Putting It All Together
Here’s the general rule of thumb:
- Traditional Accounts (IRA, TSP, 401k) → Have some conservative, income-focused investments (it does not make sense to make all your traditional investments conservative most of the time- see our bucket system article).
- Taxable Accounts (Brokerage) → Growth investments with low annual tax impact
- Roth Accounts (Roth IRA, Roth TSP) → Aggressive, high-growth investments
Of course, every individual’s situation is unique. Some may need bonds in taxable accounts for liquidity, or growth in pre-tax accounts depending on their tax bracket. But as a general strategy, aligning investments with the right type of account can significantly lower your lifetime tax burden.
Final Thoughts
Asset location isn’t flashy. It doesn’t require chasing the next hot stock or taking on more risk. Instead, it’s about being thoughtful and intentional about where your investments live.
And yet, it’s one of the most overlooked tax strategies out there. Most retirees spend their time worrying about what they’re invested in but ignore the question of where.
The good news? It’s not too late. Whether you’re still working, nearing retirement, or already retired, adjusting your asset location can put thousands—or even hundreds of thousands—of extra dollars back in your pocket over time.
You worked hard for your retirement savings. Don’t let poor asset location hand more of it over to the IRS than necessary. With the right strategy, you can keep more, grow more, and enjoy the retirement you deserve.