What is Tax Allocation?
Tax allocation refers to how your portfolio is divided among different types of accounts: taxable, tax-deferred, and tax-free. Each type of account is treated differently under tax law, which can impact how much you keep after taxes, both now and in retirement.
The goal of tax allocation is to reduce your overall tax burden over time, helping your investments grow more efficiently and giving you more flexibility when it’s time to withdraw money. In short, it’s about minimizing taxes and maximizing after-tax returns.
Why Tax Allocation Matters
Taxes can take a significant bite out of your investment returns, especially when you’re drawing income in retirement. By diversifying across account types, you give yourself options:
Flexibility – You can choose which account to draw from depending on your income needs and the tax environment at the time.
Growth potential – Certain accounts allow tax-free or tax-deferred growth, helping your money compound faster.
Future uncertainty – Tax laws change. Having a mix of accounts makes it easier to adapt to new rules without being locked into one outcome.
Tax allocation is important whether you’re just starting to save or already retired. Early on, it helps balance growth and access. Later, it allows you to manage taxable income and control your retirement tax bill.
Types of Accounts in Tax Allocation
Taxable Accounts
Examples: Brokerage accounts
How they work: You pay taxes each year on interest, dividends, and realized capital gains.
Best use: Often suited for tax-efficient investments, like index funds/ETFs or municipal bonds, and for money you may need before retirement, or as a bridge if you retire early.
Tax-Deferred Accounts
Examples: 401(k), Traditional IRA, 403(b) & 457(b)
How they work: Investments grow tax-deferred until withdrawals are made, usually in retirement. Withdrawals are taxed as ordinary income.
Best use: Good for income-producing investments (like bonds) or when you expect to be in a lower tax bracket in retirement.
Tax-Free Accounts
Examples: Roth IRA, Roth 401(k)
How they work: Contributions are made with after-tax dollars, but growth and qualified withdrawals are tax-free.
Best use: Ideal for investments with high growth potential (like stocks) since both contributions and qualified earnings can be withdrawn tax-free.
How Tax Allocation Differs From Asset Location
These terms are often confused:
Tax Allocation = How much of your portfolio is in taxable, tax-deferred, or tax-free accounts.
Asset Location = Which investments you place inside those accounts to improve tax efficiency (for example, holding bonds in tax-deferred accounts and stocks in Roth accounts).
Both strategies work together, but this feature focuses on tax allocation, showing you the mix of account types you currently have and helping you understand where you may want to adjust future contributions.
How to View Your Tax Allocation in Boldin
To view your tax allocation, go to the Net Worth Insights Report in your plan. You’ll see a breakdown of your assets across taxable, tax-deferred, and tax-free accounts. This can help you decide whether to rebalance contributions, open a Roth account, or adjust your saving strategy for more flexibility in the future.