Visualize the 3-Fund Portfolio Across the Taxable Account Types

Visualize the 3-Fund Portfolio Across Different Account Types

3-Fund Portfolio in Different Accounts


Folks like the simplicity of a 3-fund portfolio. US and International equity funds, and a bond fund all wrapped up in a pre-determined asset allocation. When you have different account types with different tax treatments, however, you add a layer of complexity.

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

When we add in tax optimization, that is asset location, you need to consider in which accounts you place your three different investments. Where are the most tax-efficient places for equity and bond funds to land? 


What is the Three Fund Portfolio?

Bogleheads popularized 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 have demonstrated 3-fund portfolios before when exploring a 50/50 Asset Allocation Portfolio and when considering how to invest in a 401k.

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

What are the Three Taxable Account Types?

Tax diversification!

Tax diversification is why you want to own different ETFs in different account types. If you have tax diversification, you can Use Your Tax Planning Window to Control Your Income during retirement.

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, there are many different types of assets or accounts. These are taxed differently.

To simplify, there are only three crucial account types to consider when thinking about tax diversification.



Lower-income folks can often Contribute to a Roth IRA and get some retirement money in the TAX-FREE bucket. Tax-Free means you paid taxes once (now), 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? Partial Roth Conversions, Backdoor Roth Contributions, and Mega Backdoor 401k to Roth IRA Rollovers are most common.



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

Worry about TAX-DRAG with these accounts. Tax drag happens when you pay capital gains tax on dividends and ordinary income on interest from investments in these accounts. You can avoid tax drag using non-deductible IRAs or a 529 as a Bonus Retirement Account. Neither are great ideas, though.

If you are well to do and want to retire at some point, you will need to have some after-tax money invested 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 accounts. Growth is tax-deferred. Eventually, when you withdraw from these accounts, ordinary taxes are due.

The government wants its taxes paid!

Tax Arbitrage (deferring income tax during peak income years and recognizing it later when you have low income) is necessary to understand.


So, there are three main account types: Roth, Brokerage accounts, and Pre-tax accounts. Let’s visualize how a 3-fund portfolio fits into them.


Visualize the 3-Fund Portfolio Across the different Account Types

Here is my grade 3 drawing of how a 3-fund portfolio sits on top of your different accounts.


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 there is 50% of the portfolio in Pre-tax, and 50% in Taxable (40) and Roth (10). This distribution is typical for high-income folks who sock away lots of money pre-tax and who 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 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 each).

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

Add them up on the right and you have 60% in 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).

Ta-Dah! You now see an example of the three-fund portfolio visualized across the three account types!

Why did I slice and dice the accounts that way? First, understand what the overall asset allocation is.

Asset Allocation Visualized in the 3-Fund Portfolio.

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

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 it is the second most important question!

Now, what about asset location?


Asset Location Visualized in the 3-Fund Portfolio

What is asset location?


Note: you want your assets with the highest expected returns in your Roth. That’s because you have already paid taxes on investments in this account. Any future growth is tax-free!

Understand, however, you are taking more risk (in terms of market volatility) to get higher expected returns.

Suppose you want to tilt or juice your portfolio (which isn’t the point of a 3-fund portfolio!). In that case, a Roth is where you put REITs, Small Cap Value, Emerging Markets, or other asset classes with higher future expected returns (and more volatility).


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 on the income when recognized. You owe ordinary income taxes on any withdrawals from pre-tax accounts. So, if you take a lot of risk in your pre-tax accounts, the government takes that risk with you.

But the point of pre-tax accounts: put your tax-inefficient funds in there, so you don’t suffer from tax drag. Equities have dividends that, when qualified, are taxed at the Capital Gains Rate. Bonds (and cash), on the other hand, pay interest which is taxed at ordinary rates. Thus, having bonds in your pre-tax account means that you don’t owe ordinary income taxes on the interest. Sweet!


Finally, in your brokerage account, place the most tax-efficient funds. This includes US equities that don’t pay out large dividends (and don’t churn or turn over), and international equities where you get a tax break due to the foreign tax credit. Ideally, in the 3-fund portfolio, international should be held in the taxable.

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


Conclusion: Visualize the 3-Fund Portfolio Across the different Account Types


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 to invest. It is highly likely if you can visualize the 3-fund portfolio across the account types, you will beat 99% of the investors in the world.

Now go out and learn about how chaos theory changes the models you use in the market and how you can be an excellent DIY physician investor.

Finally, know that behavioral investing is more important to your nest egg than any other aspect of investing.

Do you believe that?


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

  2. Is the 50% pretax, 40% taxable and 10% Roth recommended for high income individuals who can’t contribute to a Roth or is it just the most common allocation?

    • Or even better have just enough pre-tax to fill up your standard deduction every year and 1/2 in brokerage and Roth but that isn’t good arbitrage if you make a large income.

  3. “Thus, having bonds in your pre-tax account means that you don’t owe ordinary income taxes on the interest.”

    I agree you don’t pay ordinary income taxes on the initial contribution or the interest as it accrues, however you do pay ordinary income taxes on everything that you withdraw from it!

    • I second Nolan on this question. Does correcting this statement result in a different plan of allocation?

      • No. Where else will you put bonds? If you have them in your brokerage account, you have ongoing tax drag. If they are in your Roth, then you have a lower future value expectation.

        It is true that you have to pay ordinary income taxes on your pre-tax account, but remember the idea of tax arbitrage. You put money away at high tax brackets and take it out at lower ones. In addition, if you have bonds or stocks in your pre-tax accounts… which one will you pay more taxes on in the future? Stocks will make the accounts worth more, thus you pay more taxes.

  4. My biggest retirement account, by far, is in federal TSP. Not sure their bond options are that great. Started Roth and brokerage accounts late, in my late 50s. I want to get to 60/40 stock/bond allocation by 65.
    Would you recommend using TSP bond funds or buying them in Roth?

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