A. There are two main reasons for a tax diversification -
First, we don't know what future tax rates might look like (uncle Sam could change the tax rates at any time, for example, as recently as 1980, the top federal marginal income tax rate (TFMITR) was 70%. In 2017, the TFMITR is 39.6%.
Second, there are three investment accounts with different tax exposures you could choose from - a) taxable, b) tax free and c) tax deferred. So you need to make a decision about how to allocate your funds in these 3 accounts to maximize your after-tax gains, hence a tax diversification strategy.
Investments in taxable accounts that generate interest and/or short-term capital gains are taxed at your income tax rate (top rate is 39.6%), while investments that generate long-term capital gains may be subject to the more attractive top federal capital gains rate of 20%.
Investments in taxable accounts that generate dividends are generally taxed at the same tax rate as long term capital gains. For those filing single with an income of $200,000 or more ($250,00 or more if married and filing jointly), your investment gains and dividends may also be subject to 3.8% investment surtax — resulting in a cumulative 23.8% tax.
Investments in tax free accounts do not generate taxes. Investments in tax deferred accounts could reduce your taxable income today and may subject your investments to lower tax rates in the future (e.g.: during retirement).