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Tax Drag: The Silent Killer of Long-Term Returns

A 1% annual tax drag costs a 30-year investor about 23% of their ending balance. Asset location fixes most of it.

High-turnover funds spit off short-term gains taxed at ordinary income rates. Dividend-heavy stocks generate predictable yearly tax bills. Bonds throw off ordinary-rate interest. In a taxable account, every one of these compounds against you.

Asset location says: put the tax-inefficient holdings inside your 401(k) or IRA, and the tax-efficient ones (broad index ETFs, municipal bonds) in your taxable brokerage. Same portfolio, lower tax bill, no extra risk.