A recent article in Financial Planning noted that investors can generate 20 to 50 basis points each year in return by properly allocating assets among their taxable and tax deferred accounts.

Many investors make the mistake of owning assets not subject to taxes in their tax deferred portfolios.

Within tax-deferred accounts, the best fit are investments that generate income subject to the ordinary tax rate, which can be as high as 39.6%. Fran Kinniry, a principal with Vanguard’s Investment Strategy Group, argues that tax-deferred accounts are “extremely valuable shelf space,” and should be populated first by taxable bonds.

Assets in your tax deferred accounts should be the ones that generate the most taxable income. You should strive to own assets in your taxable accounts that are already tax advantaged, if they are part of your investment plan.

Taxable accounts, on the other hand, should hold growth stocks and dividend-paying stocks, many advisors say, because the capital gains and dividend tax rates applied to them won’t exceed 20% for most investors. There’s no point in housing investments that could be subject to this lower rate in a deferred account, only to pay the much-higher ordinary tax rate at the time of withdrawal, advisors say. Similarly, tax-exempt muni bonds are best suited for taxable accounts.

Also important; start spending your taxable money first. You don’t want to be racking up taxes due while depleting your tax deferred assets in retirement.

Decisions about asset location can also be critical during a client’s withdrawal phase. Most advisors agree that, before clients reach age 70 1/2, when they must make mandatory withdrawals from tax-deferred accounts, they should first draw down from their taxable accounts – allowing the tax-deferred pot to continue to grow as long as possible.