Physicians with at least one retirement account (for example, an IRA, Roth IRA or 401k) and one taxable account will benefit from higher returns with comprehensive asset location. In asset location, all accounts supporting the same financial objectives (for example, providing income in retirement) are viewed collectively as a single portfolio. Asset classes (for example, U.S. stocks or government bonds) are preferentially placed in either retirement or taxable accounts.

In taxable accounts, high-yielding assets have a higher tax burden than in retirement accounts. These assets are prioritized for placement in retirement accounts. In contrast, tax-free municipal bonds bear no tax burden, so they are preferentially placed in a taxable account. The result is the risk-adjusted expected return from the sum of all accounts increases. This is particularly important for physicians who, by virtue of being in high tax brackets, pay a lot of taxes.

Consider what happens if you place a high-yielding investment in a non-tax sheltered account. You must pay 39.6% (top tax rate) on non-qualified distributions from that investment, as opposed to sheltering that high-yielding asset in a tax-deferred account. Clearly, your net returns are dependent upon more than just appreciation. Smart asset location matters, especially for high income earning physicians.

Think of it like a hospital – a complex entity separated into different wings and departments to maximize efficiency. Each department houses doctors and staff who are best equipped for their roles. Emergency room doctors are going to be dealing with people needing the most immediate and intense level of care. An ER doctor wouldn’t treat a patient with a sprained finger while someone who was just in a traumatic car accident sits in the waiting room. In much the same way, your aggregate investment portfolio can be separated into different accounts and investment vehicles. Inside each of those vehicles are investments and holdings that are suited for the particular account type.

A more efficient hospital will lead to greater outcomes and profitability. The same is true for your portfolio. Strategic asset location maximizes efficiency and leads to better outcomes and portfolio growth.