Definition
Deciding which types of investments to hold in which types of accounts (taxable, tax-deferred, or Roth) to minimize the tax drag on the whole portfolio. It is separate from asset allocation, which decides how much of each investment you own overall.
Why it matters
Two investors with identical portfolios can keep very different amounts after tax depending on where each holding sits. Placing tax-inefficient assets, like bonds that pay ordinary income, inside tax-advantaged accounts and low-turnover stock funds in taxable accounts can add meaningful return over decades with no extra risk.
Example
An investor holds $200,000 split 60/40 between a stock index fund and a bond fund, across a $100,000 IRA and a $100,000 brokerage account. Placing the $80,000 bond position and $20,000 of stocks in the IRA, and the other $100,000 of stocks in the brokerage account, keeps the bond interest sheltered while the stock fund's qualified dividends and long-term gains get the lower rates.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.