An asset location strategy decides which of your accounts holds which investments, and it is one of the few portfolio decisions that can raise your after-tax return without raising your risk. Most investors spend considerable energy on asset allocation, meaning the overall mix of stocks and bonds they own. Far fewer stop to ask where those holdings actually sit. For households in the Sacramento region who may hold a 403(b), a 457(b), a Roth IRA, and a taxable brokerage account all at once, the placement question is worth real money over a long horizon.
What an Asset Location Strategy Actually Means
Investors generally hold money in three tax environments. Understanding how each one behaves is the foundation of the entire exercise.
- Taxable accounts. Individual and joint brokerage accounts. Interest, dividends, and realized gains are taxed in the year they occur. There are no contribution limits and no withdrawal penalties.
- Tax-deferred accounts. Traditional 401(k), 403(b), 457(b), Thrift Savings Plan, and traditional IRA balances. Nothing is taxed while the money grows, and every dollar withdrawn is taxed as ordinary income.
- Tax-free accounts. Roth IRA and Roth employer accounts. Qualified withdrawals come out with no federal tax at all, which makes these balances the most valuable dollar for dollar.
Asset allocation answers what you own. Asset location answers where you own it. The two decisions are independent, which is exactly why location is easy to overlook.
Why an Asset Location Strategy Matters More in California
California does not offer a preferential rate for long-term capital gains. The Franchise Tax Board treats a dollar of gain the same as a dollar of wages, taxed at ordinary state rates that reach 13.3 percent at the top once the Proposition 63 Mental Health Services Tax is included. You can confirm this treatment on the Franchise Tax Board site.
The practical effect is that California residents lose part of the federal benefit of holding appreciated stock in a taxable account, while still paying full state tax on interest income. That narrows some of the classic rules of thumb and makes the tax character of each holding more important, not less.
How Different Investments Are Taxed in 2026
Holdings taxed at ordinary rates
Taxable bond interest, certificates of deposit, money market income, real estate investment trust distributions, and short-term capital gains are all taxed at ordinary federal rates. These are the least tax-efficient things you can own in a brokerage account.
Holdings taxed at preferential rates
Qualified dividends and long-term capital gains are federally taxed at 0, 15, or 20 percent. For 2026 the zero percent bracket extends to $49,450 of taxable income for single filers and $98,900 for married couples filing jointly, with the 20 percent rate beginning above $545,500 and $613,700 respectively. Higher earners may also owe the 3.8 percent net investment income tax above $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers. The IRS overview of capital gains and losses covers the mechanics.
Broad stock index funds and exchange-traded funds tend to distribute little each year and defer most of their gain until you sell. That deferral is the reason they sit comfortably in taxable accounts.
A General Framework for Placing Assets
No single ordering fits every household, but the following framework is where we usually begin with clients.
| Account type | Generally a good fit | Reasoning |
|---|---|---|
| Taxable brokerage | Broad stock index funds, ETFs, individual stocks held long term, municipal bonds | Low annual distributions, preferential rates, and access to tax-loss harvesting and the step-up in basis |
| Tax-deferred (403(b), 457(b), TSP, traditional IRA) | Taxable bond funds, REITs, actively traded strategies | Ordinary income is produced anyway on withdrawal, so shelter the holdings that throw off ordinary income each year |
| Roth | The assets with the highest expected long-run growth, often equities | Growth is never taxed, so the highest-return holdings produce the largest benefit here |
One caution: the framework assumes your accounts are large enough and diversified enough that placement does not distort your overall allocation. Your target mix comes first. Location is applied on top of it, never instead of it. The SEC investor education site is a reasonable starting point on allocation itself.
Check Your Thinking
Consider the scenario below, then open each option to see how it holds up. Options open independently, so you may review all three.
A. The taxable brokerage account
B. The 457(b)
C. The Roth IRA
Common Mistakes We See
- Mirroring the same allocation in every account. Holding an identical 70/30 mix in the 403(b), the Roth, and the brokerage account is tidy, but it forfeits the entire benefit of location.
- Selling appreciated positions to reorganize. Triggering a large gain today to fix placement often costs more than the strategy saves. Redirect new contributions and rebalance inside sheltered accounts instead.
- Ignoring the state layer. Out-of-state municipal bond interest is exempt federally but generally taxable in California, which changes the arithmetic for residents.
- Overlooking withdrawal sequencing. Location and the order in which you draw accounts in retirement are related decisions, and neither should be made in isolation.
Fill the Accounts Before You Optimize Them
Location only helps if there is meaningful money in more than one tax environment. For 2026 the elective deferral limit for 401(k), 403(b), governmental 457(b), and Thrift Savings Plan participants is $24,500, with a standard catch-up bringing savers age 50 and older to $32,500, and an enhanced catch-up of $11,250 for those age 60 through 63. The IRA limit is $7,500. These figures are published by the Internal Revenue Service.
Note also that beginning in 2026, employees whose prior-year Social Security wages from the employer exceeded $150,000 must make catch-up contributions on a Roth basis. That rule quietly adds Roth space for higher earners, which is worth factoring into an asset location strategy rather than treating as a nuisance.
Bringing It Together
A sound asset location strategy is quiet work. It does not change what you own, it does not require predicting markets, and it does not show up in a headline return figure. It simply reduces the share of your return that goes to taxes each year, and compounded across decades that difference is meaningful. For households with several account types and a long horizon, it is among the most reliable improvements available.
If you would like a second set of eyes on how your accounts are arranged, we would be glad to look at it with you. Rooney Wealth Management is a fee-only, fiduciary firm serving families throughout the Sacramento region.
You may also reach us directly through our contact page to ask a question or request an introductory conversation.
Rooney Wealth Management LLC is an investment adviser registered with the state of California. This article is for educational purposes only and is not tax, legal, or investment advice. Please consult your tax or financial professional regarding your specific situation.
