You have probably spent years obsessing over Asset Allocationโhow much stock vs. bond exposure you have. That is important for growth. But in retirement, there is a silent killer of wealth that allocation doesn’t solve: Asset Location.
Here is the reality Iโve seen in 25 years of financial planning: You can have the perfect mix of investments, but if they are in the “wrong” accounts, you are volunteering for higher taxes and massive Medicare (IRMAA) surcharges.
The problem is simple: Investment income (interest, non-qualified dividends, and capital gains distributions) flows onto your tax return, increasing your Modified Adjusted Gross Income (MAGI). If that number crosses a specific threshold, your Medicare premiums skyrocket.
The solution: Strategic Asset Location. Itโs the art of placing high-tax assets in tax-sheltered accounts so their “noise” never hits your tax returnโor your IRMAA calculation.
โก Asset Location at a Glance
- The Goal: Place assets that generate “tax noise” (interest, dividends) into accounts where that income is invisible to the IRS and Medicare.
- The Trap: Holding high-yield bonds or REITs in a taxable brokerage account increases your MAGI, potentially triggering an IRMAA surcharge.
- The Muni Bond Myth: Tax-exempt interest is free from federal tax, but it is added back for IRMAA calculations. It is not a cure-all.
- The Strategy: Use your IRA for yield, your Roth for growth, and your Brokerage for tax-efficient index funds.
Key Takeaways Ahead
The Logic: Why Investment Portfolio “Yield” is the Enemy of IRMAA
To the IRS and Medicare, not all money is created equal.
- Growth (Price Appreciation): If you own a stock in a brokerage account and it goes up 20%, your MAGI does not change. You control when you sell and realize that gain.
- Yield (Interest/Dividends): If you own a bond fund that pays 5% interest, that money hits your tax return every single year, whether you spend it or reinvest it. You have zero control.
For a retiree on the edge of an IRMAA cliff, “uncontrollable income” is dangerous. By moving those income-generating assets into an IRA (where growth is tax-deferred) or a Roth IRA (where it’s tax-free), you effectively hide that income from the IRMAA calculation until you choose to withdraw it.
The Asset Location Blueprint
This table shows where you should locate specific assets to minimize the impact on your MAGI and Medicare premiums.
| Asset Type | Tax Profile | Best Location | Why? (IRMAA Impact) |
|---|---|---|---|
| Taxable Bonds / Bond Funds | Interest taxed at ordinary income rates. | Traditional IRA / 401(k) | Shields interest from AGI. Prevents annual income creep. |
| REITs (Real Estate) | High dividends, often non-qualified (taxed as ordinary income). | Traditional IRA / Roth IRA | Prevents large, mandatory dividend distributions from spiking MAGI. |
| High-Growth Stocks | Long-term capital gains (lower rates). | Roth IRA | Massive growth happens tax-free. No RMDs to force income later. |
| Index Funds / ETFs | Tax-efficient, low turnover. | Taxable Brokerage | You control when to sell. Qualified dividends get lower tax rates. |
| Municipal Bonds | Federally tax-free. | Taxable Brokerage | WARNING: Interest is added back for IRMAA MAGI. |
The Municipal Bond IRMAA Trap (Warning)
Many retirees flock to Municipal Bonds (“Munis”) because the interest is free from federal income tax. They assume this helps with IRMAA.
It does not.
IRMAA is calculated using MAGI (Modified Adjusted Gross Income). The “Modified” part means you must add back any tax-exempt interest (Line 2a on your Form 1040).
๐ก Stop Making Costly Tax & IRMAA Mistakes
One clear financial move each week โ straight from 28 years of seeing what goes wrong.
- โ Uncover the hidden fees and tax traps in your portfolio.
- โ Simple, high-impact strategies like the Asset Location Blueprint.
- โ Practical steps to reduce RMDs and lower Medicare premiums.
Strategy in Action: Investment Account Sequencing to Avoid IRMAA
Asset Location is only half the battle. You must also withdraw the money in the right order. This is called Account Sequencing.
To keep your MAGI smooth and avoid cliffs, you want to “fill up” the lower tax brackets with taxable withdrawals (like Traditional IRA distributions) and then “top off” your spending needs with tax-free money.
- The Baseline: Take your RMDs first (you have no choice).
- The Filler: Withdraw from Traditional IRAs until you hit the top of your target tax bracket (or the IRMAA cliff).
- The Capstone: If you need more cash for a new car or a trip, pull it from your Roth IRA or Cash Savings. These withdrawals do not increase your MAGI, so they are invisible to Medicare.
This is why having a Retiree Asset Allocation that spans all three account types (Taxable, Tax-Deferred, Tax-Free) is critical. It gives you control.
Frequent Reader Questions About Asset Location
๐ Master Your Retirement Income
Asset location works best when paired with these strategies:
- Financial Advisor Reveals Roth IRA Conversions Secrets โ How to move money from “Tax-Deferred” to “Tax-Free” to permanently lower your RMDs.
- 2025 RMD Calculator & IRS Rules โ Estimate the “uncontrollable income” you will face at age 73.
Does shifting assets trigger taxes?
It can. If you sell an asset in a taxable brokerage account to move it to an IRA (which you can only do via contributions), you will realize capital gains taxes on the sale. Asset location is easiest to implement with new moneyor within tax-advantaged accounts where trading doesn’t trigger taxes.
Should I put all my bonds in my IRA?
Generally, yes, but not always all of them. You still need some liquidity in your taxable account for emergencies. For that, consider I-Bonds or a savings account. Check out our guide on Understanding Series I Savings Bonds for a tax-efficient, inflation-protected option.
Does dividend reinvestment affect IRMAA?
Yes. Even if you automatically reinvest dividends in a taxable account, the IRS counts that as income received in the year it was paid. This increases your MAGI. In an IRA or Roth IRA, reinvested dividends are invisible to the IRS.
Conclusion: Control What You Keep
You cannot control the stock market. You cannot control Congress. But you can control where your assets live.
By practicing smart Asset Location, you turn your portfolio into a tax-efficient machine. You shield your income from the IRS, you keep your MAGI low, and you protect your Social Security check from IRMAA surcharges.
Your Next Steps:
- Audit your Taxable Brokerage Account. Are there high-yield bonds or REITs generating taxable income you don’t need yet?
- Review your IRA/401(k). Is it holding high-growth stocks that will turn into massive RMDs later?
- Consider a strategic rebalance to move “noisy” assets into “quiet” accounts.
If you are unsure where you stand, use our Net Worth Calculator to inventory your accounts and start sorting your assets today.
๐ก Stop Making Costly Tax & IRMAA Mistakes
One clear financial move each week โ straight from 28 years of seeing what goes wrong.
- โ Uncover the hidden fees and tax traps in your portfolio.
- โ Simple, high-impact strategies like the Asset Location Blueprint.
- โ Practical steps to reduce RMDs and lower Medicare premiums.
