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Asset Location: Which Investments Belong in a Roth IRA, a Brokerage Account and a Traditional IRA

Asset location

Two households can hold identical portfolios, take identical risk and earn identical returns, and one of them can keep meaningfully more of it. The difference is which investments sit in which account. Asset location is the least visible decision in a retirement plan and one of the few that improves the after-tax result without changing the risk.

Published September 11, 2026 by Flames Financial Planning. 11 min read.

Short answer: Put the investments that generate the most tax each year, and the ones you expect to grow the most, where the tax cannot reach them: high-growth stock funds in the Roth, taxable bonds and other ordinary-income assets in the traditional IRA, and broad low-turnover stock index funds and municipal bonds in the brokerage account. Keep the overall mix on target across all three accounts together, not inside each one. Then adjust for the exit: money for heirs favors the Roth (tax-free, no lifetime distributions) and the brokerage account (basis reset at death); money for charity favors the traditional IRA (qualified charitable distributions, or a tax-free bequest); money you will spend favors whichever account keeps this year's return cheapest.

The idea

Allocation Sets the Risk; Location Sets What You Keep

Asset allocation is the split between stocks, bonds and everything else. Asset location is the decision, made after that, about which account each of those holdings lives in. The allocation is the same either way; the tax bill is not.

Each account type taxes the same investment differently. In a brokerage account, interest and non-qualified dividends are taxed every year as ordinary income, at rates up to 37%; qualified dividends and long-term gains are taxed at 0%, 15% or 20% depending on taxable income, plus the 3.8% net investment income tax above $250,000 of joint MAGI. In a traditional IRA, nothing is taxed until withdrawal, and then every dollar is ordinary income regardless of how it was earned. In a Roth IRA, nothing is taxed at all once the distributions are qualified. Sources: IRS, Rev. Proc. 2025-32 (full text); IRS, Topic no. 559, Net investment income tax.

So the question for each holding is: how is this investment's return taxed if it is exposed, and how much return do I expect? An asset that throws off ordinary income every year is expensive to hold in a brokerage account. An asset that will grow the most is most valuable in the account where growth is never taxed. An asset that is already tax-efficient loses little by being exposed.

The traditional IRA converts every return into ordinary income at withdrawal, including returns that would have been long-term capital gains outside it. That is the cost of holding stocks there, and it is why the traditional IRA is the natural home for the assets that would have been ordinary income anyway.

The map

Where Each Kind of Investment Fits Best

InvestmentHow its return is taxed when exposedBest homeWhy
Taxable bonds, bond funds, CDs, money marketInterest, taxed every year as ordinary incomeTraditional IRA or 401(k)The return would be ordinary income anyway, so the IRA costs nothing extra and shelters the annual interest. Bonds also grow slowest, so they keep the IRA balance, and the future required distributions, smaller.
REITs and high-yield bond fundsMostly ordinary income, distributed every yearTraditional IRASame logic as bonds, with a higher yield to shelter.
Actively managed stock funds with high turnoverFrequent realized gains, some short-term, distributed whether you sell or notRoth IRA or traditional IRATheir distributions are the least controllable in a brokerage account. Growth-oriented ones lean Roth.
Small-cap, emerging-market and other high-expected-growth stock fundsLittle income; large gains eventuallyRoth IRAThe account where growth is never taxed should hold the assets expected to grow the most, and the Roth has no lifetime required distributions to force them out.
Broad U.S. and international stock index funds and ETFsQualified dividends at 0/15/20%; gains only when you sellBrokerage accountAlready tax-efficient: low turnover, qualified dividends, control over when gains are realized, foreign tax credit on international funds, and a basis reset for heirs at death.
Municipal bondsFederally tax-exempt interest (counts for Medicare IRMAA and Social Security taxation)Brokerage accountTheir exemption is wasted inside any IRA, where interest is untaxed regardless. Worth holding only if a household has more fixed income than the IRA can hold.
Cash for the next one to two years of spendingSmall interestBrokerage account or RothWhere it can be spent without creating taxable income.

Long-term gain and qualified dividend rates for 2026: 0% up to $98,900 of joint taxable income, 15% up to $613,700, 20% above. Ordinary brackets: 24% to $403,550 joint, 32% above. Sources: IRS, Rev. Proc. 2025-32 (full text); IRS, tax year 2026 inflation adjustments (Rev. Proc. 2025-32).

The map is a starting point, not a rule. A household whose traditional IRA is larger than its entire bond allocation will hold stocks there too; a household with a small Roth will not fit all its growth assets inside it. Location is done at the margin: given the accounts you have and the allocation you want, which holdings should move to make the whole thing cheaper?

Diversity

Diversified Across the Accounts, Not Inside Each One

The fear most people have about asset location is that it makes each account lopsided: an IRA full of bonds, a Roth full of small-cap stock. That is what it does, on purpose, and it is fine, because the household owns all three.

Diversification is a property of the whole portfolio. A couple with $3,000,000 across three accounts who wants 60% stocks and 40% bonds needs $1,800,000 of stock funds and $1,200,000 of bonds in total, in whatever accounts they fit best. Whether the traditional IRA on its own is 20% stocks or 80% is not a risk question; it is a tax question. The allocation is checked and rebalanced at the household level, with a single statement of the total.

Two practical consequences follow. Rebalancing happens inside the tax-advantaged accounts wherever possible, because selling there realizes nothing; the brokerage account is rebalanced with new contributions, dividends and withdrawals rather than sales. And the accounts will grow at different rates: an IRA of bonds grows slowly and a Roth of stocks grows quickly, which is exactly what you want (a smaller forced distribution later, a larger tax-free balance later) but means the location plan drifts and needs a periodic look.

One measure of the whole

Consolidating accounts helps more than most people expect: a household with a 401(k), two rollover IRAs, two Roths and two brokerage accounts cannot see its allocation without a spreadsheet, and asset location is impossible to hold to. Fewer accounts, one allocation, one rebalancing rule.

The exit

How the Answer Changes When the Money Has a Destination

Most asset-location guidance assumes the household will spend the money. For a household with $2 million to $5 million saved, a good part of it will not be spent, and where it is going changes where it should sit.

Money for heirs

Two accounts are kind to heirs. Property in a brokerage account generally takes a new basis equal to its fair market value at death, so a lifetime of gain is never taxed by anyone; the lowest-basis, highest-gain positions belong here if they are never going to be sold. A Roth IRA passes tax-free and has no lifetime distributions, so it can compound untouched until death and for up to ten more years in the heir's hands. A traditional IRA is the worst account to inherit: taxed as ordinary income at the heir's rates, within ten years. Sources: IRS, Publication 551, Basis of Assets; IRS, Retirement plan and IRA required minimum distributions FAQs.

Money for charity

The traditional IRA is the best account to give from. During life, qualified charitable distributions move up to $111,000 a year (2026) directly to charity with no tax and no effect on adjusted gross income, from age 70½. At death, a charity named as IRA beneficiary pays no income tax on it, while a child would. A household that gives should hold its charitable intentions in the IRA and its bequests to family in the Roth and the brokerage account. Source: IRS, Notice 2025-67 (2026 amounts relating to retirement plans and IRAs).

Money you will spend

Spending money belongs wherever this year's withdrawal is cheapest, which is the subject of which account to draw from first. Location supports it: keeping a year or two of spending in cash-like holdings inside the brokerage account or Roth means a market decline never forces a sale of stock, or a taxable distribution, to pay the bills.

Putting the three together, a common pattern for a household that expects to leave money: the traditional IRA is spent first and given from (conversions, withdrawals and qualified charitable distributions all shrink it), the Roth is left to grow for heirs, and the brokerage account holds the low-basis positions untouched for the step-up while its high-basis positions fund spending. The federal estate exclusion of $15,000,000 per person for 2026 means estate tax is rarely the concern; income tax in the heirs' hands is. Source: IRS, tax year 2026 inflation adjustments (Rev. Proc. 2025-32).

The 2026 details

Thresholds That Make Location Worth More

  • The 3.8% investment tax. Above $250,000 of joint MAGI ($200,000 single), dividends, interest and gains in a brokerage account are taxed an extra 3.8%. Income inside an IRA or Roth is not investment income for this purpose, so moving the income-producing assets inside removes it from the tax entirely.
  • Medicare premiums. Brokerage-account income, including tax-exempt municipal interest, counts toward the MAGI that sets Medicare surcharges two years later; above $218,000 of joint MAGI the tiers begin. Income that accrues inside an IRA or Roth does not count until it is distributed. See Roth conversions and IRMAA.
  • The 0% capital gains rate. Below $98,900 of joint taxable income, long-term gains are taxed at 0%. A household whose ordinary income is low in the early retirement years can realize gains in the brokerage account for nothing, which is a reason to hold appreciated stock there rather than in the IRA, where the same gain would be ordinary income.
  • Required distributions. The traditional IRA balance at 73 or 75 sets the forced income for the rest of your life. Holding the slow-growing assets there keeps that number down. See planning for required distributions.
  • State tax. In a state that taxes retirement income at a high rate, such as Minnesota, the IRA's eventual ordinary-income treatment costs more and the case for holding bonds rather than stocks there is stronger; in a state with no income tax the gap between account types narrows to the federal one. The state pages carry each state's treatment.

Common mistakes

What Goes Wrong

  • The same fund in every account. The default at most custodians is a target-date or balanced fund in each account, which puts bonds in the Roth and stocks in the IRA in equal measure and forgoes the whole benefit.
  • Municipal bonds inside an IRA. The tax exemption is paid for with a lower yield and then wasted, because IRA interest is untaxed anyway.
  • A Roth full of cash and bonds. The Roth is the account whose growth is never taxed; filling it with the assets that grow least spends its advantage on nothing.
  • Rebalancing by selling in the brokerage account. Every sale there can realize a gain. Rebalance inside the IRA and Roth first, and with new money and withdrawals in the brokerage account.
  • Location without a beneficiary plan. Naming children as beneficiaries of the traditional IRA and a charity as beneficiary of the Roth is backwards: the charity would have paid no tax on the IRA, and the children pay full ordinary rates on it.
  • Letting location dictate allocation. If the accounts you have cannot hold the mix you want tax-efficiently, keep the mix and accept the tax. Risk comes first; location is what you do after.

Flames FP approach

How Flames FP Handles This

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Memberships are billed quarterly in advance with no annual commitment. See what each includes on the pricing page, read how the pieces fit together on the retirement tax planning overview, or, if you are weighing a subscription firm, see the side-by-side with Facet.

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FAQ

Common Questions

What is the difference between asset allocation and asset location?

Allocation is the mix of stocks, bonds and other assets the household holds in total, which sets its risk. Location is which account each holding sits in (taxable brokerage, traditional IRA or Roth), which sets how much of the return is taxed and when. The allocation is decided first; location is applied to it.

Should bonds go in a Roth IRA or a traditional IRA?

Usually the traditional IRA. Bond interest would be taxed as ordinary income anyway, so sheltering it in the traditional IRA costs nothing extra, and bonds' slower growth keeps the IRA balance, and the future required distributions, smaller. The Roth's advantage is untaxed growth, which is worth most on the assets expected to grow most.

Which investments are best in a taxable brokerage account?

Broad, low-turnover stock index funds and ETFs (qualified dividends at 0%, 15% or 20%, gains only when sold, and a basis reset for heirs at death), municipal bonds if the household holds more fixed income than its IRAs can absorb, and near-term spending cash. Below $98,900 of joint taxable income in 2026, long-term gains realized there are taxed at 0%.

Does asset location make my portfolio less diversified?

No. Diversification is measured across all accounts together. Each account may look lopsided (an IRA heavy in bonds, a Roth heavy in growth stocks), but the household's total holds the intended mix. Rebalancing is done at the household level, inside the tax-advantaged accounts where possible.

Which account should I leave to my children, and which to charity?

Generally the Roth and the brokerage account to children (the Roth passes tax-free; brokerage holdings take a new basis at death) and the traditional IRA to charity, which pays no income tax on it. Children who inherit a traditional IRA pay ordinary income tax on it at their own rates within ten years.

Does asset location matter if I am in a low tax bracket?

Less, but rarely nothing. Even in a low bracket, holding municipal bonds in an IRA wastes their exemption, and holding growth assets in a Roth rather than a traditional IRA keeps future required distributions down. The benefit grows with the size of the accounts, the household's bracket, and the share of the money that will go to heirs rather than be spent.

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Primary sources

This article is educational and is not individualized tax, legal or investment advice. Thresholds, rates and premiums are revised every year; the figures here are for tax year 2026 as published by the sources above, and you should confirm the current year’s before acting on any of them. Advisory services are offered through Core Planning, LLC, a Registered Investment Advisor.