Asset Location in Retirement: Where to Hold Which Investments When RMDs Are Active

Asset location — holding different investment types in whichever tax account minimizes your lifetime tax cost — is well understood during the accumulation phase. Once required minimum distributions begin, the logic shifts significantly. The Traditional IRA is now being depleted on a forced schedule. The Roth IRA is the one account that compounds indefinitely with no forced withdrawals. This changes which investments belong where.

The three tax buckets and how distributions change them

Retirees typically hold wealth across three account types with very different tax treatment:¹

During accumulation, the standard guidance is to hold high-growth assets in the Roth (where gains are never taxed), hold bonds and lower-return assets in the Traditional (where tax deferral is most valuable for income-generating assets), and hold tax-efficient assets like index funds in taxable.

That framework still has merit in retirement — but RMDs introduce a new constraint: your Traditional IRA is going to be depleted whether you want it to be or not. The question shifts from "where does tax deferral add the most value" to "given that this account is shrinking, what should it be shrinking from?"

Why RMDs change the asset location calculus

In accumulation, the traditional IRA grows tax-deferred and you control when distributions happen. In the distribution phase, the IRS forces a minimum withdrawal every year — starting at about 3.8% of balance at age 73 and rising to 5% at age 80, and higher beyond that.²

Two implications follow:

1. High-growth assets in the Traditional IRA generate higher future RMDs. If you hold a portfolio of small-cap growth stocks in your Traditional IRA and they compound at 9%/year, your RMD base grows faster than the divisor shrinks — meaning your actual RMD dollar amount (and its taxable income impact) rises year over year. Every dollar of appreciation in a Traditional IRA eventually comes out as ordinary income. For a retiree in the 22–32% bracket, the effective tax drag on growth is higher than it appears.

2. The Roth IRA is the only account with an infinite time horizon. With no lifetime RMDs and no forced distributions, the Roth can compound for decades — and pass to heirs tax-free. Holding the highest-expected-return assets there maximizes the value of that tax-free compounding.

A practical framework for the distribution phase

Roth IRA: maximize tax-free compounding

The Roth IRA is the most valuable bucket to optimize in retirement. Every dollar of growth here is permanently tax-free, never subject to RMDs, and passes to heirs with continued tax-free treatment (though they face the 10-year depletion rule under SECURE Act).³

Hold in Roth: Equities with the highest expected long-run return — broad equity index funds, small-cap, international, or whatever your highest expected-return asset is. High-dividend stocks can also work well in Roth since dividends inside Roth are tax-free (vs. ordinary income in a Traditional IRA, or qualified dividends at 0–20% in taxable).

Traditional IRA: the forced-distribution bucket

The Traditional IRA is the account you're spending down. RMDs will distribute a portion of it every year as ordinary income. The question is what to hold in a bucket that's being systematically depleted.

Hold in Traditional: Assets you plan to spend or that have lower expected returns relative to growth equities. Short-duration bonds, stable value funds, and TIPS are reasonable here — they generate income you're already taking as RMDs, and their lower growth rate means lower future RMD buildup. High-yield bonds are better in the Traditional than in taxable, since their distributions would be ordinary income in either account but at least taxable at the lower of your bracket vs. leaving them in taxable where they'd also be ordinary income.

The exception — ongoing Roth conversions: If you're still executing Roth conversions (taking money out of Traditional and converting it), growth assets in Traditional have a different calculus. A $400K equity position converting into Roth at 24% is more valuable to convert than a $400K bond position. In this case, holding growth in Traditional to convert it into Roth can make sense, especially in the pre-73 window or if you're doing large annual conversions post-73.

Taxable brokerage: tax-efficient assets

The taxable account benefits from preferential capital gains rates (0% for income below $49,450 single / $98,900 MFJ in 2026; 15% up to $553,850 single / $623,050 MFJ; 20% above that) plus the step-up in basis at death.⁴ Hold assets that can benefit from these advantages:

• Broad equity index funds: Low turnover, qualified dividends (taxed at 0–20% rather than ordinary income rates), and eligible for tax-loss harvesting when markets decline
• Municipal bonds (if in the 24%+ bracket): Federal-tax-exempt income that may outperform equivalent taxable bonds on an after-tax basis
• I-bonds: Inflation-protected, federal-tax deferred until redemption, state-tax exempt
• Individual stocks with unrealized gains: You control when to realize gains; heirs receive step-up in basis eliminating the built-in gain entirely at death

Avoid holding high-yield bonds, REITs, or actively managed funds with high turnover in taxable accounts — the ordinary income and short-term gain distributions erode the tax efficiency advantage.

Using RMDs as a rebalancing tool

One underappreciated benefit of the forced-distribution structure: RMDs give you a tax-efficient way to rebalance your portfolio.

If equities have outperformed and your target allocation is now 10% overweight in stocks, you can satisfy your RMD by selling the overweight equity position in your Traditional IRA. The distribution is taxed as ordinary income regardless — but you've achieved the rebalance without triggering capital gains in your taxable account. Compare that to the alternative: selling appreciated equities in a taxable account to rebalance would trigger capital gains taxes at 15–20%.

Common mistake: wrong asset in the wrong bucket

The most frequent error we see is a retiree holding 70% bonds in a Traditional IRA "to be conservative" while holding 70% equities in a taxable account. The intention is to protect the tax-deferred account from volatility. The effect is the opposite of tax-efficient:

• The bond-heavy Traditional IRA generates lower returns — but those lower returns still come out as ordinary income via RMDs
• The equity-heavy taxable account produces qualified dividends and long-term gains taxed at preferential rates — but if those equities are also in the Roth, you're leaving the highest-value tax-free growth outside the Roth
• The Roth — if any — holds conservative assets that grow slowly, wasting the tax-free compounding potential

The goal is not to match "conservative accounts" to "conservative assets." It's to put the highest expected return in the Roth, hold in Traditional what will be spent (matching the account's forced-distribution purpose), and use taxable for tax-efficient growth with step-up benefit.

The estate planning dimension

Asset location in retirement is also an estate planning decision. A traditional IRA left to heirs must be distributed (as ordinary income) within 10 years under SECURE Act.³ An inherited Roth IRA must also be depleted within 10 years — but the distributions remain tax-free. An appreciated taxable account passes with a step-up in basis, eliminating the embedded capital gain.

For a retiree with estate planning goals:

• Traditional IRA is the worst asset to leave to heirs (fully taxable on withdrawal, no step-up)
• Roth IRA is excellent to leave to heirs (10-year rule but tax-free withdrawals)
• Taxable account is excellent to leave (step-up in basis eliminates built-in gain)

This reinforces using Roth conversions to shift wealth from Traditional to Roth, and spending down taxable assets during life (rather than leaving them for the step-up) if your heirs are in high brackets. See our guide to IRA estate planning for the full analysis.

A worked example: $2M Traditional, $500K Roth, $400K taxable

In the "before" allocation, the Roth holds a bond allocation that drags on tax-free compounding, and the taxable account holds high-yield bonds generating annual ordinary-income tax drag. In the "after" allocation, the Roth is maximized for tax-free growth, the Traditional holds appropriate assets for the forced-distribution stream, and taxable holds low-tax-drag equities eligible for step-up treatment at death.

When asset location gets complicated

These are heuristics, not formulas. The right allocation depends on:

• Ongoing Roth conversion strategy: If you're converting $100K/year from Traditional to Roth, growth assets in Traditional maximize the conversion value
• IRMAA sensitivity: If you're near an IRMAA Medicare cliff, holding lower-growth assets in Traditional slows RMD buildup and keeps future income below the threshold. See our IRMAA Calculator.
• Heir bracket assumptions: If heirs are in low brackets, leaving Traditional IRA wealth to them may be fine — they'll pay little tax on withdrawals. If heirs are in the 37% bracket, converting to Roth first makes more sense.
• Total portfolio size: With $10M+ in tax-deferred assets, the RMD buildup problem is unavoidable — a combination of conversions, QCDs ($111,000/year to charity), and asset location all work together.

These interactions are where a specialist advisor adds the most value. The decision isn't just "bonds in Traditional, stocks in Roth" — it's modeling the multi-decade tax trajectory across all three buckets simultaneously.

Sources

1. IRS — Retirement Topics: Required Minimum Distributions (RMDs). Account-type RMD rules; Traditional IRA, 401(k), Roth IRA, and Roth 401(k) treatment under SECURE 2.0.
2. IRS Publication 590-B — Distributions from Individual Retirement Arrangements. Uniform Lifetime Table divisors by age; RMD calculation methodology. Divisors verified: age 73 = 26.5 (3.77% of balance), age 80 = 20.2 (4.95%), age 85 = 16.0 (6.25%).
3. Kitces — SECURE Act Inherited IRA Rules and the Elimination of the Stretch IRA. 10-year depletion rule for non-EDB beneficiaries; inherited Roth IRA tax treatment; T.D. 10001 annual RMD requirement when decedent was past RBD.
4. IRS Topic 409 — Capital Gains and Losses. 2026 long-term capital gains rates: 0% at $49,450 single / $98,900 MFJ; 15% to $553,850 single / $623,050 MFJ; 20% above those thresholds. Per IRS Rev. Proc. 2025-32.

Asset location strategy discussed is general in nature. Tax rates and account rules verified against IRS Publication 590-B and Rev. Proc. 2025-32 (2026 tax year values). Individual situations vary; consult a tax advisor before implementing.