08/27/2026
When we talk about diversification, we usually talk about stocks vs. bonds, U.S. vs. international, large companies vs. small companies, etc.
But there’s another form of diversification that I think gets overlooked: Tax diversification.
Think about your investments as being in three different buckets:
Tax-deferred — 401(k)s, Traditional IRAs, etc.
Tax-free — Roth accounts
Taxable — Brokerage accounts
An issue I see frequently is that the majority of someone's retirement assets have accumulated in the tax-deferred bucket.
That may have provided a great tax benefit while they were working, but eventually those dollars have to come out.
And when they do, withdrawals from traditional tax-deferred accounts are generally taxed as ordinary income. Eventually, Required Minimum Distributions (RMDs) can force money out whether you need the income or not.
So how can we plan around that?
One strategy is to think about asset location, not just asset allocation and balancing that with Roth Conversions.
Let's say your overall target portfolio is: 65% stocks / 35% bonds
That does NOT necessarily mean every account you own needs to be invested 65/35.
Instead of holding the exact same 65/35 allocation inside your Traditional IRA, Roth IRA and brokerage account, we could strategically decide which investments belong in which accounts while keeping the household's overall portfolio at 65/35.
We may choose to hold more of the assets with higher expected growth in Roth or taxable accounts and more of the fixed-income allocation inside the tax-deferred account.
Why?
We're thinking about what those accounts could look like 10, 20 or 30 years from now—and how the money will eventually be taxed when you need it and along the way.
I recently ran an example through our financial planning software comparing a more strategic asset-location approach with simply allocating the accounts pro-rata.
The result?
$697,610 more in tax-adjusted ending assets.
$1,028,646 less in projected federal taxes paid.
Same overall investment allocation - different tax strategy.
Tax diversification and asset location won't look the same for everyone. But this is why financial planning goes well beyond simply picking investments.
Sometimes it's not just about what you own.
It's about where you own it.
