Holding tax-inefficient assets like bonds in a taxable account creates a yearly tax drag. See what the right location saves.
Illustrates the tax drag on income producing holdings by comparing growth when the yield is taxed annually in a taxable account versus sheltered in a tax-advantaged account.
Bonds and other income assets throw off interest that is taxed at ordinary rates every year when held in a taxable account. Paying that tax annually removes money that would otherwise keep compounding, creating a drag that widens over time. Holding the same asset in a tax-advantaged account lets the full yield compound untaxed during accumulation. This tool compares the two paths so you can see how much the yearly tax bite costs over your chosen horizon.
The general guideline is to place tax-inefficient assets like taxable bonds inside IRAs or 401(k)s, while holding more tax-efficient stocks in taxable accounts. Your own situation depends on your tax bracket, account balances, and the mix of assets you own. The comparison assumes a steady yield and constant tax rate, so real outcomes will vary with markets and law changes. This is an educational estimate and not tax advice.
Tax drag is the reduction in growth caused by paying tax on investment income each year instead of letting it compound. Over long periods this lost compounding can add up significantly.
Assets that generate regular ordinary-rate income, such as taxable bonds and REITs, generally benefit most from tax sheltering. Tax-efficient stock funds are often better suited to taxable accounts.
No, the model focuses on income taxed at ordinary rates in the taxable case and no tax in the sheltered case. Actual returns may include capital gains taxed at different rates.
See the exact formula and a worked example on our methodology page.