Asset allocation is the backbone of sound investing. While retirement accounts like 401(k)s and IRAs get much attention, non-retirement portfolios—taxable brokerage accounts, trusts, and other investment vehicles—require a different approach. I will explore how to construct a robust asset allocation strategy for non-retirement accounts, considering tax efficiency, risk tolerance, and liquidity needs.
Table of Contents
Understanding Non-Retirement Asset Allocation
Unlike retirement accounts, non-retirement investments lack tax-deferred growth. Capital gains, dividends, and interest are taxable events. This changes how I allocate assets. The goal is not just maximizing returns but optimizing after-tax performance.
Key Differences Between Retirement and Non-Retirement Accounts
| Feature | Retirement Accounts (401(k), IRA) | Non-Retirement Accounts (Brokerage) |
|---|---|---|
| Tax Treatment | Tax-deferred or tax-free growth | Taxable annually on gains & income |
| Contribution Limits | Yes | No |
| Withdrawal Penalties | Before age 59½ | None |
| Required Minimum Distributions (RMDs) | Yes (for Traditional) | No |
Core Principles of Non-Retirement Asset Allocation
1. Tax Efficiency First
Assets generating ordinary income (bonds, REITs, high-dividend stocks) belong in tax-advantaged accounts. Non-retirement accounts should prioritize:
- Low-turnover equity funds (ETFs, index funds)
- Tax-managed funds
- Growth stocks (lower dividends, deferred capital gains)
The after-tax return formula matters:
After\ Tax\ Return = Pre\ Tax\ Return \times (1 - Tax\ Rate)For example, a bond yielding 4% in a 24% tax bracket delivers:
After\ Tax\ Return = 0.04 \times (1 - 0.24) = 0.0304 \text{ or } 3.04\%2. Asset Location Over Allocation
Asset location means placing tax-inefficient assets in retirement accounts and tax-efficient ones in taxable accounts.
Example:
- Retirement Account: Bonds, REITs
- Non-Retirement Account: S&P 500 ETF (VOO), Tax-Managed Mutual Funds
3. Harvesting Tax Losses
Selling losing positions to offset gains reduces tax liability. If I have $5,000 in capital gains and $3,000 in losses, my taxable gain drops to $2,000.
Strategic Asset Allocation Models
I use a risk-based framework. Below are sample allocations for different risk profiles:
Conservative (30% Stocks / 70% Bonds)
| Asset Class | Allocation | Tax-Efficient Placement |
|---|---|---|
| US Bonds | 50% | Retirement Account |
| Dividend Stocks | 10% | Retirement Account |
| S&P 500 ETF | 20% | Non-Retirement Account |
| International ETF | 10% | Non-Retirement Account |
| Cash | 10% | Non-Retirement Account |
Moderate (60% Stocks / 40% Bonds)
| Asset Class | Allocation | Tax-Efficient Placement |
|---|---|---|
| US Bonds | 30% | Retirement Account |
| Dividend Stocks | 10% | Retirement Account |
| S&P 500 ETF | 40% | Non-Retirement Account |
| International ETF | 15% | Non-Retirement Account |
| Cash | 5% | Non-Retirement Account |
Aggressive (80% Stocks / 20% Bonds)
| Asset Class | Allocation | Tax-Efficient Placement |
|---|---|---|
| US Bonds | 15% | Retirement Account |
| Dividend Stocks | 5% | Retirement Account |
| S&P 500 ETF | 50% | Non-Retirement Account |
| International ETF | 25% | Non-Retirement Account |
| Cash | 5% | Non-Retirement Account |
Tax-Adjusted Asset Allocation
Since non-retirement accounts face taxes, I adjust allocations to reflect after-tax value. If I have $100,000 in stocks (20% unrealized gains) and $100,000 in bonds, the true allocation is:
After\ Tax\ Stock\ Value = 100,000 - (100,000 \times 0.20 \times 0.15) = 97,000 After\ Tax\ Bond\ Value = 100,000 - (100,000 \times 0.24) = 76,000The real allocation is:
Stocks = \frac{97,000}{97,000 + 76,000} = 56\%
Rebalancing in a Tax-Efficient Manner
Instead of selling appreciated assets (triggering capital gains), I rebalance using new contributions or dividends. If my stock allocation drifts too high, I direct new money into bonds rather than selling stocks.
Final Thoughts
Non-retirement asset allocation demands a tax-aware approach. By prioritizing tax efficiency, optimizing asset location, and using smart rebalancing, I maximize after-tax returns. The right strategy depends on individual goals, but the principles remain universal.
