Asset Location After You Retire: What Changes and Why It Matters

When most of us think about saving for retirement, we often start with a net worth goal—a number generated perhaps by a formula like the 4% rule or financial planning software.  Once we hit that number, we figure, the work will be done.  So, we put our heads down and earn, save, and invest diligently to achieve our retirement goal.  These working years can also be called life’s accumulation phase. 

Well, the reality is that life doesn’t stop at retirement, and neither do the financial decisions.  Hopefully we will live another several decades after our working days are over, and our accumulated assets must support us for the rest of our life.  This post-retirement era is called the distribution phase. Our choices can make or break our ability to maximize the joy and fulfillment that we had hoped for during these “golden” years.   

In my last post, I talked about how to strategically position your invested assets during the accumulation phase.   But, once the paycheck disappears and withdrawals begin, investment strategy is no longer just about maximizing growth — it’s about creating income, minimizing taxes, and extending the life of your portfolio.  That means your asset location strategy will likely need to shift.

The Goal of Asset Location Before Retirement

During accumulation, the priority is clear: tax-efficient growth.

So, you

• Put high-growth assets in Roth accounts

• Put tax-inefficient assets (bonds, REITs) in tax-deferred accounts

• Put tax-efficient assets in taxable accounts

This minimizes annual tax drag and maximizes long-term compounding.

The Goal of Asset Location After Retirement

Once you start withdrawing, your priorities evolve: income, flexibility, and longevity.

1. Maintain tax flexibility

You now want choices with the money in each of the different accounts — taxable, Roth, and tax-deferred — so you can optimize the withdrawal source each year.

2. Support reliable cash flow

Your portfolio needs to pay your bills. Deciding how to generate that income is extremely important. Does it come from interest from bonds, passive income from real estate, dividends from stock, or selling assets? Each of those have unique tax considerations.

3. Reduce lifetime taxes, not just annual taxes

This includes:

• Social Security taxation

• IRMAA Medicare surcharges

• Roth conversion opportunities

• RMD planning

• Estate strategy

  
  

4. Preserve portfolio longevity

Tax-efficient withdrawals extend retirement sustainability. It usually makes sense to use your taxable accounts first, followed by tax-deferred accounts, and save your Roth accounts until the last. That is to preserve the tax-free growth as long as possible. But there are times when using your Roth money to balance out income is appropriate.

 

Age-based distribution decisions

Retiring early (before age 59 1/2)

Remember that the government penalizes you 10% for distributing assets out of your tax-advantaged retirement accounts before the age of 59 1/2. (If you want to know more about the ways around that, check out this post where I discuss them in more detail.)

Having enough money built up in a taxable account saves you all of that hassle and extra expense. Money from this bucket is accessible to you at any time without penalty. You paid the taxes already on the amounts that you originally invested (the basis) and just owe taxes on the growth when you sell (capital gains) and the income that those assets produce.

The income generally comes in a few forms: bond interest, stock dividends, or passive income from real estate investments. Bond interest and passive real estate income is taxed at ordinary income rates. Qualified dividends (most US stocks) are taxed liked capital gains.

Instead of a paycheck from work, you now get a "paycheck" from your taxable account income. If you need more money, you can sell the assets for cash and pay the capital gains tax.

This need for income shifts your asset location strategy. Before retirement, we shielded some of these income-producing investments in a tax-deferred account so that you weren't taxed on the income each year. But now, you need that income to live on, and if you retire early, it's not accessible from your tax-deferred accounts yet. So, it makes sense to move more bonds and real estate to your taxable account.

Other advantages of taxable accounts include:

• Long-term capital gains rates are often less than ordinary income rates, especially for higher earners.

• Ability to harvest losses.  Balancing them against your gains can provide tax-free income.

• Ability to gift appreciated shares. Using a donor-advised fund, for example, you can give shares directly to a qualified charity and not pay taxes on any of the gains.  Not to mention the tax break that you get on the gift if you itemize your deductions.  

• Step-up in basis at death. If your beneficiaries sell these assets immediately after they inherit them, they pay no taxes.  If they hold on to them, they are taxed on the gains from the time of inheritance.

  
  

Building up a taxable account as you approach retirement is good planning.  And placing income-producing assets, some appreciating stocks, or low-turnover index funds in those accounts provides some flexibility.

Retirees between age 59 1/2 and RMD age (73 or 75)

Now, your tax-deferred accounts are fully accessible without penalty. Starting at age 73 (age 75 beginning in 2033), you are required to start taking money out and be taxed on it. These are required minimum distributions (RMDs) and are the key to understanding how to strategize asset location in these accounts.

If you have a large tax-deferred bucket (which most physicians do), your RMDs can be substantial and can push you back up into higher income tax brackets. For the sake of tax efficiency, then, decreasing the size of your tax-deferred bucket during this phase of retirement makes sense.

There are a few ways to do that:

1. Roth conversions. You pay taxes now while your tax brackets are low and move the money from the tax-deferred bucket to the Roth bucket. (Here is a post that talks more about that.)

2. Spend down the bucket. Now you can sell assets, or distribute the income, to support your lifestyle. This will all be taxed at ordinary income rates.

3. Put your lower growth assets here. This may be balanced index funds or bonds, where you expect the growth to be lower (but you are holding them for risk protection and to smooth out the volatility of higher growth stocks).

Also, remember that is in this phase where Social Security income and IRMAA/Medicare payments begin. These are important factors in your overall tax planning.

Retirees after RMDs begin

If you've done it right, you have managed your tax-deferred bucket to keep you in a reasonable tax bracket and have shifted a large amount of your portfolio to Roth accounts--your tax-free bucket.

Your Roth accounts switch from pure growth during the accumulation phase to optionality during retirement. Remember that you have already paid taxes on this money and you won’t owe any more in the future.  Plus, there are no required minimum distributions from Roth accounts. 

• Tax-free withdrawals in high-income years:  You can take money from Roth, and it won’t count as income. Use it to preserve your spending but with lower taxable income.

• Hedge against future higher tax rates: The advantage of Roth is that you know how much you are going to pay in taxes because you pay it at the time you invest it.  With pre-tax dollars, you are trying to predict the future.

• Reduce Medicare IRMAA surcharges:  these are based on your adjusted gross income, and Roth distributions don’t count towards AGI.  If your AGI is lower, your IRMAA costs are less.

• Leave more tax-efficient assets to heirs: your beneficiaries inherit Roth money tax-free, unlike pre-tax money on which they pay taxes at their ordinary income rate.  Chances are that when they inherit that money, they will be in their highest earning years (highest income tax bracket years). 

  
  

It often works out best to spend your Roth money last, but if you do want to use it for tax-free income sooner, then you may want to diversify the asset to lower the volatility in case of a severe market downturn right before you intend to spend it.

 

Withdrawal Strategy Drives Asset Location — Not the Other Way Around

Example sequence many physicians follow:

1. Early retirement (55–65)

• Spend from taxable

• Maintain stock exposure in taxable for favorable rates

• Do Roth conversions while income is low (pay taxes from the taxable accounts to preserve principle in Roth)

• Keep enough fixed income in taxable to avoid selling stocks at a loss

• Use tax-deferred account to supplement taxable account spending after age 59 ½.

2. Medicare + Social Security years (65–72)

• Spend from tax-deferred to keep future RMDs from bumping you into higher tax brackets.

• More Roth Conversions

• Watch IRMAA brackets

• You can use Roth accounts for tax-free income if it prevents bumping into higher tax brackets but in general, try to preserve Roth for tax-free compounding

Post-RMD years (73+)

• RMDs forced from tax-deferred accounts

• Supplement rest of income from Roth.

• Consider gifting strategies like Donor Advised Funds (DAFs) or Qualified Charitable Deductions (QCDs)

• Evaluate estate planning goals

  
  

A Practical, Physician-Friendly Asset Location Framework

Asset location in retirement is personalized and depends on your income needs and size of each bucket. Consider:

Roth accounts:

• Higher-growth stocks, if goal is to preserve capital for later in retirement or inheritance.

• Balanced funds if planning on using it for tax-free income.

• Longest compounding runway

• Secondary emergency reserve

  
  

Tax-deferred accounts (IRA/401k/403b/457):

• Bonds and lower-growth assets (to decrease future RMDs)

• Assets earmarked for QCDs or heirs in lower tax brackets

• Primary source of RMD withdrawals

  
  

Taxable brokerage:

• Broad stock index funds (low turnover, fewer taxes compared with actively managed funds)

• Income producing assets: Dividend-efficient ETFs, bonds, real estate funds.

• Source for early retirement spending

 The Bottom Line

Asset location doesn’t end when you retire — it becomes even more important. Retirement isn’t just about having enough money. It’s about controlling:

• When money is taxed

• How much is taxed

• Which accounts fund which goals

• How long your portfolio lasts

• What legacy you leave

And smart asset location is one of the simplest, most effective ways to achieve all of that.

If you’re approaching retirement or already retired and want help aligning your investments, taxes, spending, and estate plan, feel free to reach out. You can learn more or schedule a conversation at Targeted Wealth Solutions.

Disclaimer: the material in this blog post is intended for general educational purposes only and should not be considered specific financial advice. You should always consult with your personal financial advisor to see how it might fit within your personalized financial plan.