Do you wonder where you need to keep certain assets? By that I mean do you know where to keep what as far as tax advantaged or non-tax advantaged. Because not all assets should be kept in the same kinds of accounts. We will look at some of the more common asset classes and where you should plan on keeping them to gain the maximum you can get from each. It is important that you understand that not assets classes need to be treated the same way. Some will do better kept in certain accounts. Now to examine the asset and where it is best kept.
If you want or already have an annuity the best place to keep these is a taxable account. The reason here is a very simple one; they are already tax advantaged, to begin with. If you were to place an annuity in a tax-sheltered account, you would be doing a redundant exercise that would not gain you any advantage at all.
If you were to hold corporate bonds, these would be best maximized in a tax-deferred account. The reason here is the interest paid on the bond would be taxed at your ordinary income tax rate so why not let the interest grow tax deferred and pay the ordinary taxes on the money when you withdrawal the funds from the tax-advantaged account.
For small capitalized stocks or growth stocks this would depend on a few factors. Generally speaking, these types of equities would be best kept in a taxable account as the long-term capital gains on such assets is about 15% as compared to your taxable income. However, if you expect your tax rate to be less than 15% in retirement, you should place these assets in a tax-deferred account instead. I really do not believe that many people would benefit from keeping these assets in a tax-deferred account as 15% is about as low as you will get anyway. That and I do not see taxed really decreasing in the long-term as the deficit for the nation is growing and will continue to grow for the foreseeable future.
An equity that has a high yield dividend should be treated the same as small capitalized or growth stocks and that is to place them in a taxable account. The dividends will be taxed at the low rate of 15% and not at your ordinary income tax rate. This basically makes owning equities in tax deferred account fairly pointless as they are taxed at a relatively low 15% regardless and your ordinary income tax rate could be considerably higher than that.
Master Limited Partnerships should be placed in a tax-deferred account as the earnings that they produce are not treated as dividends that qualify for 15% tax treatment. That means that no matter what these special dividends will be taxed as ordinary income unless placed in the tax-advantaged account where the proceeds can grow tax deferred until such time as you start to make withdrawals.
Municipal bonds should always be kept in a taxable account as the interest income they produce is not subject to taxes provided the bond meets certain criteria. Municipal bonds are always exempt from federal taxes and most state taxes provided that the bond is issued by the state you reside in. And since these bonds are tax-free, to begin with, they simply do not need to be held in a tax-advantaged account.
Now preferred stock should be held according to how the earnings are paid. If the stock pays a true dividend, then the stock can be placed in a taxable account with the dividends being taxed at 15%. If the stock pays interest, it is best to place it in a tax-advantaged account as that would be taxed as ordinary income and does better growing in a tax sheltered account.
Real Estate Investment Trusts are treated similarly to Master Limited Partnerships where the dividends are not taxed as true dividends. Meaning that they are taxed as ordinary income and not the normal dividend rate of 15%. This is why they are best placed in a tax-sheltered account that will allow the earnings to grow tax-deferred for many years and tax upon their withdrawal.
The US issued bonds are best maintained in a taxable account as they are tax-free from state and local taxes anyway. The only tax you have to pay on the interest paid on US issued bonds is federal taxes thereby limiting the value of placing them in a tax advantaged account.
If you have any questions or need any assistance in where to place an asset, feel free to contact me directly.
