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How Placing Your Investments Wisely Can Lower Taxes—And Your RMDs

When planning for retirement, most investors focus on what to invest in—stocks, bonds, cash, and other assets. But where you hold those investments can have a major impact on your after-tax returns and your annual Required Minimum Distributions (RMDs) in retirement.

What Is Asset Location?

Asset location means strategically placing different types of investments in the right accounts to maximize tax efficiency. The three main account types are:

• Taxable accounts (brokerage): pay taxes annually on interest, dividends, and realized gains.
• Tax-deferred accounts (Traditional IRA/401(k)): contributions and growth are tax-deferred, but withdrawals are taxed as ordinary income and subject to RMDs.
• Tax-free accounts (Roth IRA/401(k)): contributions are after-tax, but growth and qualified withdrawals are tax-free; Roth IRAs are not subject to RMDs.

Why Put Equities in Roth IRAs and Bonds in Traditional IRAs?

• Equities (stocks) have higher expected returns. Placing them in a Roth IRA means all future growth is tax-free, maximizing the benefit of the Roth’s unique tax treatment (Vanguard, 2022; Morningstar, 2025).
• Bonds generate regular interest, taxed at high ordinary income rates. Holding bonds in a Traditional IRA defers this tax until withdrawal, and withdrawals may occur in lower tax years.
• Roth IRAs are not subject to RMDs. By placing your fastest-growing assets (stocks) in Roth, you avoid ballooning RMDs from traditional accounts as your portfolio grows.

Long-Term Tax Impact During Retirement Withdrawals

• Roth IRA Withdrawals: All growth, including large equity gains, is withdrawn tax-free. This is especially powerful over decades, as equities typically outpace bonds in returns. During retirement, you can tap this account for tax-free income, which can help manage your overall tax bracket and legacy planning.
• Traditional IRA Withdrawals: All withdrawals are taxed as ordinary income. By holding mostly bonds (lower growth) in these accounts, the amount subject to ordinary income tax and RMDs is smaller over time than if it held high-growth equities.

The RMD Angle: How Asset Location Can Lower Your Required Minimum Distributions

Required Minimum Distributions (RMDs) are mandatory withdrawals from most traditional retirement accounts starting at age 73. These withdrawals are taxed as ordinary income and can push retirees into higher tax brackets, affect Medicare premiums, and even Social Security taxation.

Asset location can help reduce your RMDs:

• By holding your highest-growth assets (stocks) in Roth IRAs (which have no RMDs), you keep your traditional IRA balances—and thus your RMDs—lower.
• Lower RMDs mean less forced taxable income and more control over your tax situation in retirement (Kiplinger, 2022).
• This can also help avoid “tax torpedoes” that occur when RMDs push you into higher tax brackets or trigger higher Medicare premiums.

“Asset location can boost after-tax returns because your tax-deferred accounts will grow more slowly (and so will your future tax liability), while your tax-free accounts will grow the most.”

— Kiplinger, 2022

Example: The Long-Term Effect

Suppose you have $500,000 in a Traditional IRA and $500,000 in a Roth IRA. If you put all your stocks in the Roth and all your bonds in the Traditional IRA, after 25 years, the Roth could be worth much more (due to higher equity growth), and your Traditional IRA (and thus your RMDs) would be lower than if you split both accounts 50/50 between stocks and bonds (Kiplinger, 2022).

Key Takeaways

• Placing stocks in Roth IRAs maximizes tax-free growth an avoids RMDs altogether.
• Placing bonds in Traditional IRAs defers taxes on interest and helps keep RMDs—and thus taxable income—lower in retirement.
• Result: More after-tax income, lower tax bills, and a more flexible retirement withdrawal strategy.

Want to see how asset location could improve your retirement outlook and reduce your RMDs?

Contact me today for a personalized analysis.

This article is for informational purposes only and does not constitute tax or investment advice. Please consult with your tax advisor or financial planner before making any changes to your portfolio or withdrawal strategy.

References

• Vanguard: Revisiting the Conventional Wisdom Regarding Asset Location (2022)
• Morningstar: Asset Location—A Tax-Aware Investment Strategy (2025)
• Kiplinger: Using Asset Location to Defuse a Retirement Tax Bomb (2022)
• TIAA: Why Asset Location Matters as Much as Asset Allocation (2024)
• Schwab: How Asset Location Can Help Save on Taxes (2024)
• Bogleheads: Tax-Efficient Fund Placement
• iShares: Minimize Taxes & Maximize Returns in Retirement (2023)
• Morningstar: These 4 Strategies Can Reduce Your RMDs (2025)