“Pay more, get less” isn’t exactly a compelling sales slogan, but that’s what active money managers are trying to peddle.
TAX EFFICIENT FUND placement is an often underrated topic. The goal of the tax efficient fund placement is to minimize taxes within your investments, and select the right account for those investments.
But how much does that actually matter?
Vanguard’s research finds that a thoughtful asset location strategy can add significantly more value than an equal location strategy. The value added typically ranges from 5 to 30 basis points of after-tax return, depending on circumstances (e.g., income, portfolio size).
Investors generally have access to different account types, including:
If you are an employee that may not have access to a retirement plan, you could perhaps consider a Solo 401(k) if you have "side hustle" business income.
Generally, if your investments are all in tax-deferred or tax-free accounts, fund placement will not make a huge difference for you. That is because these accounts already come with tax efficiency.
If that's your case, two things become important though:
1. Consideration between pre-tax, like Traditional 401(k) or after-tax account, like Roth 401(k). Put simply, this decision generally comes down to your marginal tax rate now versus marginal tax rate in the future (which isn't something easy to predict due to the ever-changing tax landscape).
2. Account allocation. It becomes equally important where exactly you are investing. Roth accounts grow tax-free and qualified withdrawals are tax-free. You likely don't want to hinder that growth by choosing conservative assets (like fixed income, Money Market Funds, and so on).
Tax-efficient fund placement becomes extremely important when you also have a taxable brokerage account, along with tax-advantaged accounts. Many funds pay dividends and distribute capital gains if placed in your taxable brokerage account. At the end of the year, you receive a 1099 with that income and must pay taxes on the dividends and certain distributions.
One thing to call out from history is that you generally shouldn't hold Target Date Retirement mutual funds (or any "proprietary" funds) in your brokerage account. This is because unexpected redemptions could cause a huge tax bill.
You may remember a Vanguard 2021 fiasco where Vanguard opened an institutional TDF to more investors (lowered the minimum investment from $100M to $5M), which caused smaller retirement plans to sell out of individual funds and move into the institutional fund. This triggered massive unexpected capital gains for anyone invested in the individual funds if held in a brokerage account.
All of those unnecessary taxes could've been avoided by:
Let me give you a simple example:
Let’s say you are in a 22% federal tax bracket and a 5% state tax bracket, and you have some money invested in a dividend fund like Schwab US Dividend Equity ETF (SCHD). SCHD dividends are generally qualified, which means that the dividends get preferential treatment at a 15% federal tax rate for this investor.
The dividend yield is 3.43%. Considering the tax rates, the tax drag is (15% + 5%) * 3.43% = 0.686%.
To put this in perspective, a $10,000 investment will yield ~$343 in annual dividends. The tax impact on that investment will be $60.86.
Of course, if that money was in a Roth IRA, you would pay $0 in taxes on dividend distributions. Alternatively, this is something you may need to decide whether a dividend-focused investing strategy is the right one for you. For example, a Total US Stock Market ETF could have almost 3x less tax drag, and potentially more growth.
As someone in their 20s (who is subject to the Net Investment Income Tax) my focus is 100% on a growth investment strategy, rather than income generation. For someone in their 60s, that strategy could be different (even though selling shares for capital gains is better from a tax timing point of view).
A few more important points:
REIT stocks/ETFs are the least tax-efficient asset class to hold in a brokerage account because their distributions aren’t qualified, so you pay more tax (even though it may qualify for a 199A deduction).
Stocks that don’t pay dividends are the most tax-efficient to hold within your taxable account (Adobe, Amazon, Netflix, and others). However, holding individual stocks may not be the best strategy from an investment and diversification standpoint.
A big benefit of a taxable account is that the money is always easily accessible (liquidity), and you can control your withdrawal timing. While there are strategies that allow you to withdraw from retirement accounts before age 59 (like Rule of 55, 72(t) SoSEPP, Roth conversions), a brokerage account is more flexible. Therefore, analyzing the contributions and investments that go into this account is crucial.
How do you maximize tax efficiency? Let us know in the comments!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
NO. 29: WHAT MATTERS to long-term stock investors is the market’s dividend yield and growth in earnings per share. Everything else is noise that can bully and seduce us into foolishness.
PREPARE FOR a long life. For a quick gauge of your life expectancy, try the Social Security and Society of Actuaries' Longevity Illustrator calculators. What will you learn? First, the longer you live, the longer you can expect to live. Second, lifespans vary widely. Educated, health-conscious Americans might live three or four years longer than average.
NO. 27: COST-CONSCIOUS investors can save thousands over their lifetime. Take two investors who salt away $5,000 a year for 40 years. One pays 1% of assets in annual investment costs, while the other incurs 0.1%. If both earn 5% a year before expenses, the cost-conscious investor will amass $618,000, while the high-cost investor garners $494,000.
MARKET PORTFOLIO. This is the investable universe—all securities available for purchase. It consists of four sectors of roughly similar size: U.S. stocks, U.S. bonds, foreign stocks and foreign bonds. This is what all investors own and reflects our collective judgment of what securities are worth. Arguably, if you own a different mix, you’re making a market bet.
NO. 29: WHAT MATTERS to long-term stock investors is the market’s dividend yield and growth in earnings per share. Everything else is noise that can bully and seduce us into foolishness.
I’M DEBATING whether my life is better described by Tom Cochrane’s Life Is a Highway or Eddie Rabbitt’s Driving My Life Away. In a recent article, I noted that our family has driven our cars about 1.9 million miles. Since I’m the family’s King of the Road, I’ve been along for at least two-thirds of that ride.
I’m also, alas, the king of lost time.
The average commuting speed in the Washington,
LAST YEAR, I fouled up my Pennsylvania EZ Pass account. I bought a used car in Maine and forgot to add it to my EZ Pass account. Much later, when I got back up to Maine this Memorial Day, my post office box was bulging with dunning notices from Pennsylvania, New York, Maine and Delaware.
For most of a year, I had driven from Washington D.C. to Maine blissfully unaware that my EZ Pass transponder wasn’t paying a cent.
IT HAS BEEN THREE months since we closed on the sale of our home and drove away from the storage unit that contains everything we couldn’t donate, sell, give away or take with us. It was a big decision to have no fixed abode, and we feel great about it.
We’re about to move our rambling lifestyle across the pond to spend some time in the U.K. and continental Europe, and we have no return date in mind.
THIS PAST YEAR marked my 50th anniversary of driving. Over that time, our family has owned 19 cars and driven them roughly 1.9 million miles. While latte purchases frequently evoke financial debate, cars seem less discussed, despite being Americans’ second-largest expenditure after housing. The purchase, ownership, maintenance and sale of cars can all get pretty complicated.
Cars are considered a depreciating asset, but not always. My first car was a 1967 Mercury Comet, which I bought for $400 in 1973.
IN THE PAST, WE’VE always bought certified preowned cars. We know new cars lose a big chunk of their value when you drive them off the lot, so we had our eye on a used car when we started our search earlier this year.
Our goal was a Mercedes Benz GLC 300 AWD 4MATIC. My husband enjoys the negotiating and drama that comes with buying a car, so he investigated choices, checked out prices at dealerships and was ready to start his usual two-to-three-month car hunt.
ONCE I GRADUATED college and started working fulltime, I knew what my first major purchase would be: a sporty new car. I was jealous of the cars my friends drove in high school. I had just spent four years grinding through an undergraduate engineering program. I was ready to reward myself.
To prepare for the purchase, I minimized my expenses. I shared an apartment with two friends who had also just graduated from college.
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Tax Efficiency
ArticleBogdan Sheremeta | Apr 4, 2026
TAX EFFICIENT FUND placement is an often underrated topic. The goal of the tax efficient fund placement is to minimize taxes within your investments, and select the right account for those investments.
But how much does that actually matter?
Vanguard’s research finds that a thoughtful asset location strategy can add significantly more value than an equal location strategy. The value added typically ranges from 5 to 30 basis points of after-tax return, depending on circumstances (e.g., income, portfolio size).
Investors generally have access to different account types, including:
If you are an employee that may not have access to a retirement plan, you could perhaps consider a Solo 401(k) if you have "side hustle" business income.
Generally, if your investments are all in tax-deferred or tax-free accounts, fund placement will not make a huge difference for you. That is because these accounts already come with tax efficiency.
If that's your case, two things become important though:
1. Consideration between pre-tax, like Traditional 401(k) or after-tax account, like Roth 401(k). Put simply, this decision generally comes down to your marginal tax rate now versus marginal tax rate in the future (which isn't something easy to predict due to the ever-changing tax landscape).
2. Account allocation. It becomes equally important where exactly you are investing. Roth accounts grow tax-free and qualified withdrawals are tax-free. You likely don't want to hinder that growth by choosing conservative assets (like fixed income, Money Market Funds, and so on).
Tax-efficient fund placement becomes extremely important when you also have a taxable brokerage account, along with tax-advantaged accounts. Many funds pay dividends and distribute capital gains if placed in your taxable brokerage account. At the end of the year, you receive a 1099 with that income and must pay taxes on the dividends and certain distributions.
One thing to call out from history is that you generally shouldn't hold Target Date Retirement mutual funds (or any "proprietary" funds) in your brokerage account. This is because unexpected redemptions could cause a huge tax bill.
You may remember a Vanguard 2021 fiasco where Vanguard opened an institutional TDF to more investors (lowered the minimum investment from $100M to $5M), which caused smaller retirement plans to sell out of individual funds and move into the institutional fund. This triggered massive unexpected capital gains for anyone invested in the individual funds if held in a brokerage account.
All of those unnecessary taxes could've been avoided by:
Let me give you a simple example:
Let’s say you are in a 22% federal tax bracket and a 5% state tax bracket, and you have some money invested in a dividend fund like Schwab US Dividend Equity ETF (SCHD). SCHD dividends are generally qualified, which means that the dividends get preferential treatment at a 15% federal tax rate for this investor.
The dividend yield is 3.43%. Considering the tax rates, the tax drag is (15% + 5%) * 3.43% = 0.686%.
To put this in perspective, a $10,000 investment will yield ~$343 in annual dividends. The tax impact on that investment will be $60.86.
Of course, if that money was in a Roth IRA, you would pay $0 in taxes on dividend distributions. Alternatively, this is something you may need to decide whether a dividend-focused investing strategy is the right one for you. For example, a Total US Stock Market ETF could have almost 3x less tax drag, and potentially more growth.
As someone in their 20s (who is subject to the Net Investment Income Tax) my focus is 100% on a growth investment strategy, rather than income generation. For someone in their 60s, that strategy could be different (even though selling shares for capital gains is better from a tax timing point of view).
A few more important points:
REIT stocks/ETFs are the least tax-efficient asset class to hold in a brokerage account because their distributions aren’t qualified, so you pay more tax (even though it may qualify for a 199A deduction).
Stocks that don’t pay dividends are the most tax-efficient to hold within your taxable account (Adobe, Amazon, Netflix, and others). However, holding individual stocks may not be the best strategy from an investment and diversification standpoint.
A big benefit of a taxable account is that the money is always easily accessible (liquidity), and you can control your withdrawal timing. While there are strategies that allow you to withdraw from retirement accounts before age 59 (like Rule of 55, 72(t) SoSEPP, Roth conversions), a brokerage account is more flexible. Therefore, analyzing the contributions and investments that go into this account is crucial.
How do you maximize tax efficiency? Let us know in the comments!
Bogdan Sheremeta is a licensed CPA based in Illinois with experience at Deloitte and a Fortune 200 multinational.
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