Common advice for asset allocation to increase tax efficiency is to:
- Put bonds in tax-advantaged accounts (401k, Roth IRA, etc)
- Put stocks (e.g., S&P 500 ETF) in regular brokerage accounts
The reason behind this advice is that bond dividends are taxed at higher levels than capital gains. (See the Boglehead book for details)
I've been doing this for many years, and my brokerage accounts have grown a lot (thanks to amazing stock growth over the last 10 years) and my tax-advantaged accounts have grown very slowly (because of low interest rates). I have 60/40 split with stocks/bonds. Tax-advantaged accounts are all bonds and I have some bonds in the brokerage account.
There are two downsides to the current situation:
- I'd like to have more money in my tax-advantaged accounts to get better tax advantages.
- More importantly, when I need to rebalance by selling stocks and buying bonds, it is a taxable event and I'd rather defer those taxes until retirement.
Would I get a better tax advantages if I ignore this common advice and put some stocks in tax-advantaged accounts? Or even completely reverse the advice and put all my stocks in tax-advantaged accounts?!?