Using Multiple Account Types to Maximize After-Tax Returns

Most people treat their investment accounts like separate buckets-each one filled with the same mix of stocks and bonds. But that’s not how the tax system works. The IRS doesn’t care if your Roth IRA and taxable brokerage have identical holdings. What it cares about is where those assets sit, and how they generate income. That’s where using multiple account types strategically makes all the difference.

Why Your Accounts Shouldn’t Look the Same

If you’ve got a 401(k), a Roth IRA, and a taxable brokerage account, and you’ve copied the same 60/40 portfolio into each, you’re leaving money on the table. Not because you picked bad funds. But because you ignored how taxes treat different types of returns.

Bonds pay interest. That interest is taxed as ordinary income-up to 37% federally, plus state taxes. Stocks pay dividends, and when you sell them after holding over a year, you pay lower capital gains rates-often just 15% or 20%. That’s a huge difference.

The smart move? Put your bonds in accounts where you won’t pay taxes every year. That means Traditional 401(k)s and Traditional IRAs-tax-deferred accounts. Let your stocks live in taxable accounts, where capital gains get favorable treatment. And use Roth accounts for assets you expect to grow the most-like domestic or international stocks-because withdrawals there are completely tax-free.

This isn’t theory. Betterment’s 2022 white paper tracked 20 years of market data and found that investors who did this simple reallocation saw their after-tax returns rise by 0.25% to 0.75% per year-without changing risk or adding more money. That’s not a small gain. Over 30 years, a 0.5% annual boost on a $500,000 portfolio adds over $150,000 in extra after-tax wealth.

How Asset Location Works in Practice

Let’s break it down by account type and asset class:

• Tax-deferred accounts (Traditional 401(k), Traditional IRA): Best for bonds, REITs, and actively managed funds. These generate regular taxable income. By sheltering them here, you avoid paying taxes on dividends and interest every year.
• taxable brokerage accounts: Best for tax-efficient assets-domestic stocks, ETFs, and index funds. Capital gains are taxed only when you sell, and long-term gains get lower rates. International stocks also belong here because you can claim foreign tax credits on dividends.
• Tax-exempt accounts (Roth IRA, Roth 401(k)): Best for high-growth assets. Since withdrawals are tax-free, put your most aggressive growth stocks here-especially small-cap, emerging market, or tech-heavy funds. The longer they grow, the more you save.

Fidelity’s 2023 modeling shows this strategy delivers the biggest bang for investors in the 24%+ federal tax bracket. For someone earning $200,000 or more, the benefit can reach 0.58% per year. But if you’re in the 10% or 12% bracket, the gain shrinks. That’s because your tax bill on dividends and interest is already low.

And here’s a key detail: don’t just move assets once. Tax coordination means treating all your accounts as one big portfolio. When you add new money, the system should automatically direct it to the most tax-efficient account based on your current allocation. Betterment and Wealthfront do this automatically. Vanguard’s version requires a bit more setup, but still handles the rebalancing across accounts.

Who Benefits Most-and Who Doesn’t

This strategy isn’t for everyone. It works best if you have:

• At least two different account types (preferably three)
• Combined balances over $100,000
• A long time horizon (10+ years)
• A high enough income to be in the 24%+ tax bracket

If you only have a Roth IRA and no taxable account, there’s no coordination to do. If you’re retired and living on Social Security and Roth withdrawals, your tax rate is already low-so the benefit fades.

And if you’re trading often? Forget it. Tax coordination assumes you hold investments for years. Frequent buying and selling wipes out the tax advantage through short-term capital gains and transaction costs. A 2023 Journal of Financial Planning study found that portfolios with turnover over 20% per year saw no net benefit from coordination.

Even worse, placing the wrong assets in the wrong accounts can hurt you. REITs, for example, are terrible in taxable accounts because they pay high dividends taxed at ordinary rates. But they’re also not ideal in Roth accounts-you’re wasting the tax-free space on an asset that doesn’t grow much. They belong in tax-deferred accounts.

Real-World Results and Common Mistakes

User feedback tells a mixed story. On Reddit, one investor reported that Betterment’s tax coordination added 0.6% annually to his returns over three years. He had to manually adjust for California’s state taxes, but still came out ahead.

But others ran into problems. One Wealthfront user paid $327 in extra accounting fees after a partial transfer triggered an unexpected tax event. Why? Because the system didn’t account for his specific holding periods or cost basis.

The biggest mistake? Assuming the platform will handle everything perfectly. Tax coordination tools are smart-but they’re not psychic. They don’t know about your state’s tax rules unless you tell them. They don’t know if you’re planning to retire early. They don’t know if you’re about to inherit a large IRA.

That’s why you need to understand the basics. You don’t need to be a CPA, but you should know:

• What’s taxed when and how
• Which assets belong in which accounts
• How to check your platform’s allocation reports

Betterment’s setup guide says it takes 2-3 hours to learn. Vanguard’s materials take 4. That’s not a lot of time for a strategy that could add six figures over your lifetime.

What’s New in 2025

The game is changing. In 2023, Betterment launched Advanced Tax Coordination, which now factors in state tax rates and projected future tax brackets. Vanguard added municipal bond optimization for residents of high-tax states like California and New York.

The IRS is also stepping in. Their 2024 proposed regulations would make inherited accounts easier to coordinate-potentially adding another 0.15% in annual returns for beneficiaries.

Looking ahead, AI-driven tools are testing predictive models that adjust allocations based on your expected income changes. One beta tool at Wealthfront can estimate whether you’ll be in a higher or lower tax bracket in retirement, then shift assets accordingly.

Platforms are also moving toward deeper integration with tax software. By 2025, most major robo-advisors will connect directly to TurboTax and H&R Block, so your investment strategy and tax return are in sync.

What to Do Next

If you have multiple accounts and want to start coordinating:

1. Log into your investment platform and link all your accounts (401(k), IRA, brokerage).
2. Check if your platform offers tax coordination-most do. Betterment, Wealthfront, Vanguard, and Schwab all have it.
3. Run their simulation. It will show you your current tax inefficiency and projected gains.
4. If you’re in the 24%+ bracket and have over $100,000 in assets, turn it on.
5. Review your allocation every 6 months. Make sure bonds are still in tax-deferred accounts and high-growth stocks are in Roth.

Don’t wait for perfection. Start with what you have. Even a partial move-like shifting your bond holdings into your 401(k)-can give you half the benefit.

Frequently Asked Questions