Placing assets in the best accounts for tax purposes (US)
In this article, I will try to discuss the best placement of assets in order to maximize the utility of taxable as well as tax deferred accounts.
In an ideal world, one would be able to invest everything through a taxable or tax deferred account. Unfortunately, there are limits to those tax-deferred accounts, including amounts and timing of contributing to those amounts. There are a lot of different tax-deferred accounts to use for investment purposes. Hence, the intelligent investor needs to think through those trade-offs, and determine the best course of action to achieve the stated result of maximum wealth accumulation.
In general when it comes to taxes, there are various trade-offs. With a taxable account, you pay taxes today on distributions received and potentially pay taxes when a gain is realized in the future. With a tax-deferred account, you have two general options. The first option is to defer taxes upfront, and defer taxes on distributions and capital gains until you sell and start withdrawing money in the future. The second option is to pay the tax upfront, and then defer taxes on distributions and capital gains, while also avoiding tax when money is withdrawn into the future.
These are general guidelines of course. There are loopholes and gotchas that could invalidate each of those statements potentially. But the goal of this article is to learn some basic ideas first, rather than get bogged down in minutiae that varies for each separate individual.
That being said, I wanted to answer for myself and for readers what is the best place to put different types of investments. Examples include REITs, Dividend Paying companies that pay a qualified dividend, as well as companies that do not pay a dividend (or perhaps pay a small dividend yield today).
The next phase of the calculation involves reviewing which course of action is optimal in terms of saving taxes each year versus saving on a lifetime of taxes paid.
Keep reading with a 7-day free trial
Subscribe to Dividend Growth Investor Newsletter to keep reading this post and get 7 days of free access to the full post archives.