Here’s a conversation I often have with clients.
They’ve done everything right. They have diversified portfolio, stocks and bonds balanced to fit their risk tolerance, savings on autopilot for years. And then tax season rolls around, and they ask me, “Why does it feel like I’m handing so much of this back?”
Most of the time, the answer isn’t about what they own. It’s about where they own it.
Asset Allocation vs. Asset Location – What’s the difference?
Asset allocation is the piece most people know, that is how you split your money between stocks, bonds, and everything in between. Asset allocation is foundational, and we spend a lot of time getting it right for each client.
But asset location is the quieter cousin nobody talks about at dinner parties, and asset location can be just as impactful to what actually stays in your pocket. It’s simply this: which account should hold which investment? A taxable brokerage account? A tax-deferred IRA or 401(k)? A tax-advantaged Roth that can allow for tax-free distributions?
If you get this wrong, you could be paying Uncle Sam more than you need to, year after year, without ever realizing it.
The general idea
Different investments generate income in very different ways, tax-wise. So, it makes sense to match them up with the account that fits:
- Taxable accounts are the natural home for things that are already tax-efficient — municipal bonds, index funds, ETFs, stocks you hold long-term. They don’t need extra shelter.
- Tax-deferred accounts (traditional IRA, 401(k), 403(b)) are a good spot for less tax-efficient holdings, like corporate bonds, actively managed funds, short-term positions, the kind of things that would otherwise create a tax headache every year.
- Roth accounts can be a good option for investments with the biggest growth potential, since none of that growth gets taxed on the way out.
When you line these up well, you can reduce what we call “tax drag”, that’s the slow leak of returns to taxes that could’ve stayed invested and working for you.
Roth conversions: a way in the back door
If you’re earning $168,000 or more (MAGI) in 2026, you already know the front door to a Roth IRA is closed to you. But there’s a back door: a Roth conversion.
Here’s how it works. You move money from a traditional, pre-tax account into a Roth, and you pay the tax bill on that amount now. From that point forward, the account grows tax-free, and qualified withdrawals in retirement come out tax-free too. No required minimum distributions ever forcing your hand. And if you never need the money, it can pass to your kids or grandkids without the delay and expense of probate.
The real opportunity is timing. If you find yourself in a lower-income year, or perhaps between jobs, early in retirement before Social Security kicks in, or during a slow year for the business, that can be the ideal window to convert at a lower tax rate. Just be sure to consult with your financial advisor regarding your personal situation before making any financial decisions.
At the same time, Roth conversions require some attention to detail. For one thing, Roth conversion outcomes depend on many factors that are subject to change, such as future tax law. Also, they may not be suitable for all investors. Remember, you can take nontaxable withdrawals from a Roth IRA as long as you are at least 59 ½ and the account has been held at least 5 years. Otherwise, any earnings withdrawn may be subject to ordinary income tax and a 10% penalty.
The bottom line
It’s not just what you earn. It’s what you keep! And a big part of what you keep comes down to decisions most people never think to make, not “should I invest,” but “where should this specific dollar live.”
If you’d like to take a closer look at how your accounts are lined up, we’re happy to help.
— Larry Mathis, CFP®, AIF® Mathis Wealth Management
