Why Asset Location Matters More Than You Think
Many BigLaw attorneys focus on what to invest in but overlook where to hold those investments. Asset location—the strategy of placing investments in accounts that minimize taxes—can significantly impact your long-term after-tax returns.
Every investment generates different types of taxable income, and different types of accounts offer varying levels of tax protection. The key is aligning investments with the right accounts to reduce tax drag while maintaining your overall asset allocation.
The Three Types of Investment Accounts
To implement a tax-efficient asset location strategy, you need to understand the tax treatment of the three main types of investment accounts:
Taxable Accounts (Brokerage Accounts)
Taxation: Subject to capital gains tax on realized gains and taxes on dividends and interest.
Liquidity: Fully accessible with no withdrawal penalties.
Best for: Tax-efficient investments like ETFs, tax-managed mutual funds, and individual stocks with long-term growth potential.
Tax-Deferred Accounts (Traditional 401(k) & IRA)
Taxation: Contributions are pre-tax, and investments grow tax-deferred, but withdrawals are taxed as ordinary income.
Liquidity: Penalties apply for early withdrawals before age 59½, with some exceptions.
Best for: Tax-inefficient investments like bonds and high-dividend stocks that generate ordinary income for tax purposes.
Tax-Free Accounts (Roth 401(k) & Roth IRA)
Taxation: Contributions are after-tax, but investments grow tax-free, and withdrawals are also tax-free.
Liquidity: Roth IRAs allow tax-free withdrawals of contributions at any time (but not earnings). There are exceptions to this, however, in the case of “backdoor” Roth IRA contributions.
Best for: Growth-oriented investments like stocks that may appreciate significantly over time.
Which Investments Belong in Which Accounts?
The general rule is to minimize taxes while keeping your overall asset allocation intact.
Taxable Accounts (Brokerage) → Tax-efficient investments
Index funds and ETFs (low turnover)
US stocks (often pay “qualified” dividends)
Municipal bonds (tax-free interest)
Tax-Deferred Accounts (Traditional 401(k)/IRA) → Tax-inefficient investments
Bonds (interest is usually taxed as ordinary income)
REITs (relatively high dividend distributions)
Actively managed funds (frequent trading = higher tax impact)
Tax-Free Accounts (Roth 401(k)/IRA) → High-growth investments
Stocks with high long-term return potential that benefit the most from no future taxation on capital gains.
Small-cap and international stocks (higher risk/reward)
This approach allows tax-heavy assets to grow in protected accounts while tax-friendly investments remain in taxable accounts for greater efficiency.
BigLaw Attorneys: Unique Considerations
BigLaw attorneys often have high taxable incomes and need to plan for future tax changes. Here are a few key strategies:
Max Out Tax-Advantaged Accounts First – Contribute the IRS maximum to your 401(k), Health Savings Account (HSA), and backdoor Roth IRA before investing in taxable accounts, assuming your liquidity fund has already been established and you are not saving in your brokerage account for other short-term goals.
Use Mega Backdoor Roth Strategies – If your firm allows After-Tax 401(k) contributions (different than Roth), consider converting them to a Roth for more tax-free growth.
Think About Future Tax Brackets – If you expect to be in a lower tax bracket later (e.g., after retiring or leaving BigLaw), prioritize tax-deferred savings now.
Final Thoughts: Keep Your Portfolio Tax-Smart
Optimizing asset location doesn’t change what you invest in—but it can improve how much of your investment returns you keep. By aligning investments with the right accounts, you can minimize taxes, boost efficiency, and improve your long-term financial outlook.
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