Asset Location Drag Estimator (high-level) - Tool
What the tool is for
Provide a quick, year-ahead estimate of how much current-year taxes may reduce portfolio return - and a first-pass view of the improvement some investors may see by placing the highest-tax income (dividends/interest) inside tax-advantaged accounts first. It focuses on today’s income taxes, not unrealized gains.
So what? Many investors reinvest dividends without noticing that after-tax amounts differ by account. Seeing the drag in dollars makes the trade-offs tangible and can guide where future contributions or rebalancing may go.
Key Takeaways
- “Tax drag” is the yearly reduction in return from taxes on dividends and interest. The tool estimates it using simple, transparent math.
- Location often matters more than selection for income-heavy holdings. Sheltering higher-taxed income first may reduce drag.
- You control the assumptions. Set yields, account types, and tax rates to reflect your situation; rerun as it changes.
- Outputs show dollars and percentages. A second view estimates a “simple optimization gain” from a straightforward replacement of holdings.
- It’s educational, not tax advice. Real-world rules (state taxes, NIIT, RMDs, trading costs) can change results.
How to use each section
1) Holdings by Account
This is where the tool learns what the investor owns today and where it lives.
- Holding name: A plain-English label (e.g., “REIT Index,” “Total Bond Fund”).
- Income type: Choose Qualified (e.g., qualified dividends/LTCG rates) or Ordinary (e.g. most bond interest, REIT ordinary distributions).
- Account (current): Select Taxable, Traditional, or Roth to reflect where the holding sits now.
- Balance: The current dollar amount in that holding.
- Income yield (%/yr): Estimated annual dividend/interest rate. If a holding pays no income, enter 0.
Why it helps: Classifying income type and account type determines which tax rate applies to each dollar of income. Income-heavy assets in taxable accounts usually create more drag than the same assets in Traditional or Roth accounts
2) Tax Rates Used
Enter the effective rates for the household.
- Qualified dividend / LTCG tax rate: Many households fall into the 0%/15%/20% brackets (IRS, 2025). Enter the rate that applies to the investor.
- Ordinary income rate: An estimate of the marginal rate for interest and non-qualified income (e.g. 22%–37%).
- Extra tax add-on (state/NIIT, blended): Optional field to capture additional layers (e.g., state income tax, 3.8% NIIT where applicable). Using a blended estimate keeps the model simple.
Why it helps: These rates drive the drag math: drag $ ≈ income × applicable tax rate. Transparent inputs keep the results easy to audit.
3) Estimate Drag
Click Estimate drag to view four headline cards and a visual:
- Current annual drag ($): Dollar cost of taxes on this year’s dividends/interest given the current placement.
- Current drag (% of portfolio): The same drag scaled to portfolio size - useful for apples-to-apples comparisons.
- Simple optimization gain ($): A heuristic estimate of the improvement if higher-tax ordinary income is sheltered first using available tax-advantaged space.
- After change: drag (% of portfolio): A post-move estimate, holding account sizes constant for the exercise.
- Visual bars: Side-by-side bars that contrast current drag vs. the post-move estimate.
Why it helps: The cards turn a fuzzy concept into concrete numbers - useful when prioritizing contributions, rollovers, or rebalancing venues.
4) Detail by Holding
A table breaks down today’s setup and the heuristic suggestion.
- Income type confirms the rate bucket.
- Account (current) shows where the asset lives now.
- Income yield focuses the estimate on near-term cash income.
- Tax drag $ (current) quantifies the annual dollars attributed to that holding.
- Suggested account (heuristic) points to where similar investors often place that income type (e.g., ordinary-income REITs into tax-advantaged first), while staying neutral and non-prescriptive.
- Tax drag $ (suggested) shows the model’s estimate if only the simple placement rule is applied.
Why it helps: Seeing the largest drag contributors at a glance often clarifies which small changes may matter most.
Interpreting results with real-world context
- Rates change. Brackets and NIIT rules have changed before and may change again; check current IRS guidance.
- State taxes matter. The optional add-on lets the user reflect state effects at a high level.
- Behavioral traps: Many investors leave legacy positions in taxable accounts due to inertia, even when new contributions could be directed to tax-advantaged accounts that better fit income type. A yearly check helps counter that inertia.
This interactive tool is for educational purposes only and provides a simplified, high-level illustration of how income taxes may affect portfolio returns. It is not tax advice, investment advice, or a recommendation to buy, sell, or reallocate any asset. The outputs are based on user-entered assumptions and do not account for all tax rules, state taxes, trading costs, withdrawal rules, loss harvesting, RMDs, or individual circumstances. Results are hypothetical, may differ materially from actual outcomes, and should not be relied upon for tax-planning or investment decisions.
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