How you divide your money between taxable and tax-exempt (or tax-deferred) accounts can affect investment returns. A 2010 Morningstar study found investors who did not consider tax implications in their investment choices lost 1 to 2 percent of annual returns to the U.S. Internal Revenue Service. In the course of saving for retirement, this can really add up. So which investment vehicles should you place into taxable and tax-exempt accounts?
Dividend-paying stocks, exchange-traded notes, low-turnover stock holdings, and master limited partnerships should be held in taxable accounts, such as one you might have with a brokerage firm or a Roth IRA.
Real estate investment trusts (REITs), bonds, high turnover investments, hedge fund holdings, commodities, options, and futures work to an investor’s benefit in tax-exempt or tax-deferred accounts, such as a traditional IRA.
Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.
