If you want to earn as much from your portfolio as you can, it's not enough to try to find the best investments possible. Often, the more important consideration is where you'll put those winning stocks once you find them.

Nowadays, you have a huge number of choices about where to invest your money. You can choose between investing directly with mutual fund companies, or using a brokerage account to buy and sell individual stocks. In addition to taxable accounts, you also have a wide array of tax-advantaged account types, from traditional and Roth IRAs to employer-sponsored 401(k) plans, 529 plans for college savings, and annuities. Given all your options, how can you decide where you should put your money to work?

One strategy
Which types of accounts you use to invest depend greatly on your own personal financial situation. For many working-age investors, minimizing taxes is one of the primary benefits of investing. Maximizing the use of 401(k) and traditional IRA contributions not only bulks up your retirement savings, but also gives you the biggest current tax breaks possible. And for those who anticipate being in a higher tax bracket in the future, the permanent tax-free income that a Roth IRA offers can be even more attractive than the current deductions you’d take with a traditional IRA.

In all likelihood, though, you'll eventually have some money in a whole bunch of different places. Then the question becomes how best to allocate that money among the investments you want to make. Deciding which accounts to use to buy each stock or fund you want can make a huge difference.

An example
As an example, consider this portfolio of seven stocks and funds:


Current Price

5-Year Avg Annual Return

Dividends Per Share Over Past 5 Years

ExxonMobil (NYSE:XOM)




PotashCorp (NYSE:POT)




Bank of America (NYSE:BAC)








Southwest Airlines (NYSE:LUV)




Lockheed Martin (NYSE:LMT)




iShares DJ Real Estate (NYSE:IYR)




Source: Yahoo Finance. As of Aug. 12.

Say you have your money evenly split between a Roth IRA, your 401(k), a traditional IRA, and a taxable account. Which account would you use to hold each investment?

Obviously, the same stocks will give you the same end value before taxes. The difference comes solely from how taxes affect you. Here's a quick rundown:

  • Roth IRAs love big growth stocks. Because any investment you own within a Roth IRA will never get taxed, your Roth should be where you keep the investments that have the most appreciation potential. If you're a high-income taxpayer and had put Apple and Potash into a Roth IRA five years ago, your tax savings over putting them into a traditional IRA would now exceed the amount of your initial investment.
  • Traditional IRAs and 401(k)s work well with income-generating investments. Investments like REITs and bond funds generally don't have the growth potential that growth-oriented stocks have, but they're still useful to have in a portfolio. Especially if their dividends don't qualify for lower tax rates, it's important to have them in a tax-sheltered account like a traditional IRA or 401(k).
  • Taxable accounts like stability. Because taxes on capital gains and dividends are currently capped at 15%, taxable accounts can be great places for stocks that don't fit into other alternatives. Unlike other accounts, though, you can't trade in and out of stocks without triggering taxes, so it's better to put your long-term stocks here and keep your trading in your tax-sheltered accounts. At the same time, taxable accounts are the only place where you can harvest tax losses.

So in hindsight, you would have done best keeping Apple and PotashCorp in your Roth IRA; the iShares DJ Real Estate Fund, ExxonMobil, and Lockheed Martin in a traditional IRA or 401(k); and Bank of America and Southwest in your taxable account. Switch them around, and you'd owe a whole lot more in taxes.

Pay attention to taxes
Unfortunately, it's not enough simply to pick investments that will rise in value. To make the most from your portfolio, you have to take taxes into consideration. It'll surprise you just how big a difference it can make to put your investments in the right places.

How do you decide which accounts to use for particular investments? Tell me about it in the comment box below.

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Fool contributor Dan Caplinger has investments scattered across all of his accounts. He doesn't own shares of the companies mentioned in this article. Apple is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps everything where it belongs.