Asset Location and Smart Withdrawals: Decisions That Can Add to Your Plan | Allworth Financial

When people think about investment strategy, they usually focus on what they own, hopefully according to their income needs and risk tolerance. Stocks, bonds, alternatives, cash. But just as important are these two powerful planning decisions:

1. Asset location: which investments go in which types of accounts
2. Distribution order: which accounts you tap for income, how much, and in what order

Both can materially impact your after-tax wealth over time, and both are areas where a little intentional planning can go a long way.

Let’s break them down.

Part 1: Asset Location

Asset location is simply the practice of matching investments with the accounts where they’re most tax-efficient.

Here are the major three big account “buckets”:

• Taxable accounts (brokerage, trust accounts)
• Tax-deferred accounts (traditional IRAs, 401(k)s)
• Tax-free accounts (Roth IRAs, Roth 401(k)s)

Each bucket has different tax rules, which means different investments behave better or worse tax-wise depending on where they live.

Taxable Accounts: Tax Efficiency Matters

In taxable accounts, you pay taxes as you go. Interest, dividends, and capital gains all show up on your return. That makes these accounts a good home for investments that are naturally tax-efficient, such as:

• Broad-based equity ETFs and index funds
• Stocks with qualified dividends
• Investments held for long-term capital gains
• Municipal bonds, in some cases

Why? Because long-term capital gains and qualified dividends are generally taxed at lower rates than ordinary income. Plus, taxable accounts offer flexibility. You can harvest losses, manage gains, and step up cost basis at death.

In other words, taxable accounts reward patience and intentional trades. They do not reward random turnover that results in lots of short-term capital gains or investments with non-qualified dividends.

Tax-Deferred Accounts: Ordinary Income

Traditional IRAs and pre-tax 401(k)s grow tax-deferred, but every dollar you eventually withdraw is taxed as ordinary income. They don’t have preferential rates or get special treatment.

That makes them a logical place for investments that are already taxed harshly anyway, such as:

• Bonds and bond funds
• REITs
• High-turnover strategies
• Actively managed funds with frequent distributions

Since the IRS is taking its cut later regardless, you may as well shelter the investments that throw off ordinary income today.

One important note: tax-deferred growth is powerful, but required minimum distributions (RMDs) can become a planning challenge later. Asset location should always be considered alongside long-term distribution planning, not in isolation.

Roth Accounts: Prime Real Estate

Roth accounts are the penthouse suite. Tax-free growth, tax-free withdrawals, and no RMDs during your lifetime.

That makes them ideal for:

• Higher-growth assets
• Equities with strong long-term appreciation potential
• Investments you want to leave to heirs
• Assets with higher expected volatility, assuming you can stay invested

Because Roth space is limited and valuable, every dollar in a Roth should earn its keep. Since everything in this account is tax free, you want this account to grow the most. Parking low-growth assets here is like storing boxes in a Ferrari.

Part 2: Distribution Order

Once you move from accumulation to spending, a new question takes center stage:

Which accounts should I draw from first?

The default answer many people hear is “taxable first, then tax-deferred, then Roth.” That approach can work, but it’s just a starting point. Smart distribution planning is about managing tax brackets over time, not just minimizing taxes in a single year.

The Traditional Framework, and Its Limits

A common sequencing strategy looks like this:

1. Taxable accounts first
2. Tax-deferred accounts next
3. Roth accounts last

The logic is straightforward. Let tax-advantaged accounts keep growing, and preserve Roth assets for later years or heirs. But this approach can backfire if it leads to:

• Very large RMDs later
• Higher Medicare premiums
• Increased taxation of Social Security
• Losing the opportunity to use lower tax brackets earlier in retirement

Sometimes “paying a little tax now” is far better than “paying a lot later.”

Filling the Brackets Intentionally

In many early retirement years, especially before RMDs and full Social Security benefits begin, taxable income can be very low. That creates an opportunity.

Instead of avoiding IRA withdrawals entirely, it may make sense to:

• Take partial distributions from tax-deferred accounts
• Execute Roth conversions up to a targeted tax bracket
• Blend withdrawals from multiple account types in the same year

The goal is to smooth taxable income over time through tax bracket management.

Roth Accounts: Strategic, Not Sacred

Roth accounts are incredibly valuable, but that doesn’t mean they should never be touched.

There are situations where Roth withdrawals make sense, such as:

• Avoiding higher Medicare IRMAA surcharges
• Preventing taxation of Social Security benefits
• Managing cash flow during market downturns
• Coordinating with large one-time expenses

The key is that Roth dollars are flexible. Used thoughtfully, they give you control when the tax code tries to take it away.

RMDs Change the Math

Once required minimum distributions begin, the IRS sets the schedule. You lose some control, whether you like it or not. That’s why distribution planning should start years earlier. Waiting until RMD age to think about taxes is like waiting until turbulence to read the safety card. Earlier, smaller withdrawals or Roth conversions can reduce later forced income and increase long-term after-tax wealth.

Pulling It Together

Asset location and distribution strategy are deeply connected. One influences the other.

The right approach depends on:

• Current and future tax brackets
• Account balances and growth expectations
• Social Security timing
• Legacy goals
• Market conditions
• Health and longevity considerations

These decisions, when done well, they can add flexibility, reduce taxes, and increase the probability that your wealth supports the life you actually want to live. At Allworth, this kind of planning sits at the center of what we do. Because money is complicated enough. Your strategy shouldn’t be accidental.

If you’re not sure whether your investments are in the right places or your future withdrawals are working with the tax code instead of against it, that’s a conversation worth having.

This information is meant for educational purposes and not as direct tax or legal advice. Rules and regulations can shift anytime, so it’s always best to consult a qualified tax advisor, CPA, or attorney for guidance tailored to your specific situation.