Asset Location
Which assets belong in which accounts — bonds in tax-deferred, growth in Roth, and the math of why it matters
Two investors each hold $500,000 split equally between stocks (8% expected return) and bonds (4% expected return). Investor A puts bonds in her 401(k) and stocks in her Roth. Investor B does the opposite — stocks in the 401(k), bonds in the Roth.
After 25 years at these rates, Investor A's after-tax wealth is approximately $78,000 higher. Same total portfolio. Same allocation.
Same contributions. The only difference: which asset sat in which account. This is asset location.
Different account types shield different things from tax: - Tax-free (Roth): Shields ALL future growth from tax. Put your highest-growth assets here — the bigger the growth, the more tax you avoid. Growth stocks, small-cap, aggressive equity.
- Tax-deferred (Traditional 401k/IRA): Shields annual income from tax drag, but withdrawals are taxed as ordinary income (up to 37%). Put income-generating assets that would otherwise be taxed at high rates.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 3 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1The core principle
- 2Asset location decision matrix
- 3Quantifying the asset location benefit