Investors can potentially save a significant amount of money by strategically allocating their assets between taxable and tax-sheltered accounts. This decision is crucial for those with investments in both retirement accounts and taxable accounts. Financial planner Allan Roth emphasizes the importance of this strategy, suggesting that bonds, which typically have high-taxed ordinary income, should be held in tax-sheltered accounts. On the other hand, stocks, which are often taxed at lower rates, are better suited for taxable accounts.
Municipal bonds, often thought of as tax-exempt, actually have taxes built into their yields. By reshuffling assets from taxable accounts to tax-sheltered accounts, investors can potentially increase their tax-sheltered returns. This adjustment can lead to significant benefits over the long term, as demonstrated in a hypothetical investment scenario provided by Vanguard.
Roth IRAs, where withdrawals are tax-free, offer substantial advantages in tax savings. By strategically placing assets with the highest expected returns in a Roth IRA, investors can maximize their tax benefits. However, the decision between pretax IRAs and Roth IRAs may not be as significant for individuals with consistent tax brackets.
Certain assets benefit more from tax sheltering than others. A ranking of investments from those most in need of tax sheltering to those better suited for taxable accounts helps guide investors in making strategic decisions. Assets like preferred stocks, high-grade bonds, and CD ladders are more suitable for tax-sheltered accounts, while actively managed mutual funds and high-dividend stocks should be avoided in taxable accounts.
Master limited partnerships, which often deliver untaxed dividends in the early years, are best held outside of retirement accounts due to potential tax complications. Additionally, commodity funds, high-yield corporate bond funds, and income stocks are among the assets that should be considered for tax-sheltered accounts.
Maintaining a balanced approach and considering the psychological aspect of asset allocation, including the ability to rebalance and access funds in different market conditions, are also important factors to consider when reshuffling assets between taxable and tax-sheltered accounts. Ultimately, by understanding the tax implications of different investments and strategically placing them in the most advantageous accounts, investors can potentially save thousands of dollars in taxes over the long term.
