The 3-Fund Portfolio in Different Account Types

The 3-Fund Portfolio in Different Account Types

Brokerage, Roth, Pre-tax, and the 3-Fund Portfolio


Folks like the simplicity of a 3-fund portfolio. Both US and International equity funds and a bond fund are all baked together in a set asset allocation. However, when you have different account types with different tax treatments, there is a tad more to consider.

How can we optimize the 3-fund portfolio across the different account types?

When we add asset location (also known as tax optimization), you need to consider the different taxation of the accounts and the tax efficiency of the funds.

Where are the most tax-efficient place for equity and bond funds to land? 


What is the Three Fund Portfolio?

Bogleheads suggest the 3-fund portfolio, a simple mix of total US and total International equity ETFs and some fixed-income (usually a total bond ETF). These three funds comprise your overall asset allocation (equities + bonds=100%).

I show a 3-fund portfolio exploring a 50/50 Asset Allocation Portfolio.

Once you know which ETFs you want, where do you own them?

What are the Three Taxable Account Types?

The three types of accounts are brokerage, pre-tax, and Roth. Of course, it’s a little more complicated than that, as you see in the table below. But why do you want some of the three taxable account types?


Tax diversification!

Tax diversification helps you to Use Your Tax Planning Window to Control Your Income during retirement, which controls the amount of taxes you pay over your lifetime.

As different types of investments are taxed differently, and account types vary in their tax treatment, it pays to pay attention.  

Tax treatment of account types

Figure 1 (Tax treatment of account types)

As seen above in figure 1, many different types of assets or accounts exist. These are taxed differently.

To simplify, there are only three account types to consider when considering tax diversification.



Roth is the TAX-FREE bucket. Tax-Free means you paid taxes, and all future growth and withdrawals are tax-free. Roth money is precious; gather it whenever you can. 

How can higher-income folks get money in Roth accounts? The most common are  Partial Roth Conversions, Backdoor Roth IRA Contributions, and Mega Backdoor 401k to Roth IRA Rollovers.



Often called a taxable investment account, a brokerage account invests after-tax money.

Worry about TAX-DRAG with these accounts when you pay 1) capital gains tax on dividends and 2) ordinary income on interest. 

If you want basic wealth above and beyond maxing out your retirement accounts, you need to invest after-tax money in a brokerage account. Just do so efficiently: a primary subject below.



Pre-tax accounts are often called retirement accounts. You get a tax break when you put money in pre-tax. Growth is tax-deferred. Eventually, when you withdraw from these accounts, you pay ordinary taxes.

Tax Arbitrage (deferring income tax during peak income years and recognizing it later when you have low income) helps you understand what to do with these accounts. Instead of buy low and sell high, you want to lock in taxes as insurance against future tax rate increases. Do you think taxes will be higher in 10-20 years or lower?


Finally, let’s look at my picture of the three fund portfolio in the different account types. 


The 3-Fund Portfolio in the Accounts 

This is my 3rd-grade drawing of the 3-fund portfolio in the different account types. 


How a 3-Fund Portfolio fits Across the different types of accounts

Figure 2 (How a 3-Fund Portfolio fits Across the different types of accounts)

Above in figure 2, you can see the three account types: Pre-tax, Taxable, and Roth. Note that 50% of the portfolio is Pre-tax, 40% is Taxable, and 10% is Roth. This distribution is typical for high-income folks who sock away lots of money pre-tax and have little opportunity to fund Roths. 

On the left are the three funds: US Equity, International Equity, and Bonds.

In the Pre-tax account, you have 60% invested in the US and 40% in Bonds. The little numbers in parentheses are the percentage times the 50% (which is the size of your pre-tax compared to your whole portfolio).

In taxable, you are 50/50 US and international (which, in parentheses, is 20% of your total).

Finally, in the Roth, you have 100% in the US (10% of your portfolio).

Add them up on the right, and you have 60% in the US (which is a part of all three account types), 20% in international (which is just in your brokerage account to take advantage of the foreign tax credit), and 20% in bonds (held only in pre-tax to be tax-efficient).

Asset Allocation and the 3-Fund Portfolio.

So, what is your asset allocation? You are 80/20! US (60) plus International (20) equals 80%; the rest are bonds. 

Asset allocation is the second most important decision you make (the first is deciding to invest). Asset allocation has to do with risk tolerance. It is a bit more complicated than that, but not as complicated as asset location.


Asset Location in the 3-Fund Portfolio

Asset location is the right ETF in the right place. Tax efficiently locating your investments depending on the account type. The big three:


While you want your assets with the highest future expected returns in your Roth because future growth is tax-free, you take more risk (as in market volatility) to get higher after-tax returns.

Since typically you plan to “spend” Roth money last (or, more likely, give it to the kids), you have a very long time for Roth accounts to grow. Invest in funds with the highest future expected returns.

Suppose you want to tilt your portfolio (whisn’tsn’t the point of a 3-fund portfolio!). In that case, a Roth is where you put asset classes with higher future expected returns (and more volatility). Is that Small Cap Value, Emerging Markets, or small cap emerging markets, who knows?


And in your pre-tax account, think about this for a second; you actually don’t own the whole thing. The government owns part of the account. You (or your heirs) will pay taxes. If you take a lot of risk in your pre-tax accounts, the government takes that risk with you. You might owe more in taxes but have more after-tax money, too.

But the point of pre-tax accounts, at least when first considering tax-efficient fund placement, is to take advantage of tax-deferral and put tax-inefficient funds in there.

You need to get to your specified asset allocation; you have some tax-inefficient funds to put somewhere. If you put them in pre-tax, you don’t suffer from tax drag.

Equities have dividends usually taxed at the Capital Gains Rate. Bonds and cash pay interest which is taxed as ordinary income. Bonds in your pre-tax account mean you don’t owe ordinary income taxes on the interest.


Keep it simple. Only the most tax-efficient ETFs in brokerage accounts. There are only four acceptable ETFs to buy in your brokerage account.

The only four ETFs allowed in a brokerage account:

  1. Total US or S&P500 ETF 
  2. Total International ETF
  3. If you want to get complicated, remember growth pays a smaller dividend than value, so have growth in your brokerage account and value in a tax-protected account
  4. I’m getting confused. I think #4 was for international growth, but this is getting crazy. Some people have Munis (or other Bond-Alternatives including Buffered ETFs) in their brokerage account because they have some liquidity needs 2-7 years from now


I cover everything I know about asset location in Tax-Efficient Investing and Portfolio Optimization.


The 3-Fund Portfolio in Life 

There you have it. You have an asset allocation efficiently located among the different accounts.

Believe it or not, that is 90% of what you need to know. If you can tax-optimize the 3-fund portfolio, you will beat 95% of investors. 


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  1. Love your down-to-earth explanations. You have a knack for simplifying complex information!

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