Overview · 3 min read
Tax-efficient investing
Where you hold an investment can matter as much as which investment you choose. Placing tax-heavy assets in sheltered accounts and tax-light ones in taxable accounts, called asset location, keeps more of your return every year.
- Who it fits
- Anyone with taxable brokerage and retirement accounts.
- Figures
- 2026 tax year
The key rule
Hold investments that throw off ordinary income (bonds, REITs, high-turnover funds) in retirement accounts. Hold broad index funds, municipal bonds and long-term stock in taxable accounts.
How it works
How each type of investment income is taxed:
- Interest from bonds and cash: ordinary income rates.
- Qualified dividends: 0%, 15% or 20%.
- Long-term gains (held more than a year): 0%, 15% or 20%.
- Short-term gains: ordinary income rates.
- Net investment income tax: an extra 3.8% above $200,000 of income ($250,000 joint).
5 steps
List your accounts
Taxable brokerage, 401(k), IRA, Roth IRA and HSA each have different tax treatment.
Place tax-heavy assets first
Bonds and other income-heavy funds go into pre-tax accounts. Your highest expected growth goes into Roth accounts.
Favor tax-efficient funds in taxable accounts
Broad index funds and ETFs distribute few capital gains.
Consider municipal bonds
At high federal and state rates, in-state municipal bonds can beat taxable bonds after tax.
Rebalance inside retirement accounts
Selling there creates no tax.
Example
Moving bonds into the 401(k)
You hold $200,000 of bond funds in a taxable account paying 4.5%, which is $9,000 of interest taxed at your 35% federal rate plus state tax. Holding the bonds in your 401(k) and more stock funds in the taxable account keeps the same mix but removes most of that yearly tax.
Common mistakes
- If company stock makes up a large share of your net worth, address that first.
- Holding fast-growing assets in pre-tax accounts while putting bonds in your Roth. It works backwards.
- Selling in a taxable account just to rebalance, when you could rebalance inside retirement accounts instead.
Questions we hear
Should I use municipal bonds?
Compare the tax-equivalent yield. At a 35% federal rate plus a high state rate, a 3.5% in-state municipal bond can beat a 5% taxable bond.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.