Tax drag is the compounding lost when the IRS taxes dividends, interest, and realized gains in a taxable account. A traditional IRA or Roth does not tax those internal flows (Pub. 590-B). The chart is a $500,000 sleeve: $1,058 tax on VTI at 1.41% and 15%, versus $4,800 on bonds at a 4% planning yield and 24%.
Location is the first fix. Kitces / Murray (2022): sort by yield × tax rate and shelter the least efficient dollars first — taxable bonds and REITs. Broad U.S. equity can live in taxable. Do not sell a large gain to relocate; redirect the next contribution.
Do not park international in an IRA for the FTC. The credit exists only when the income is in U.S. taxable income (Pub. 514). Vanguard prefers ex-U.S. equity in taxable for most investors (5–10 bps). VXUS TTM yield is 2.59%; VTI's is 1.41%.
Spend taxable first. Convert enough traditional IRA to Roth to fill empty ordinary brackets without crossing the 2026 0% long-term-gain cap ($98,900 joint / $49,450 single). A couple with only the $32,200 standard deduction can convert $131,100 and pay $11,372 (8.7%). Rerun Target FIRE on earlyfire.quest at 3.5% and 4.0% with that conversion.
Federal tax that year ($)
Vanguard VTI profile (accessed 25 Aug 2026): 2025 income return 1.41% by NAV. $500,000 × 0.0141 × 0.15 = $1,057.50 (chart $1,058). Same × 0.238 NIIT stack (IRS Topic 559) = $1,677.90 (chart $1,678). Bonds: $500,000 × 4% planning yield × 24% ordinary (Rev. Proc. 2025-32; 24% starts at $105,700 single / $211,400 joint) = $4,800. The 4% yield is a planning rate, not a fund quote. Federal income tax only; no state.