Tax Efficient Investing

If you have investments in stocks, bonds, ETFs, or mutual funds, holding your investments in different accounts based on tax treatment can add to your long-term returns by allowing you to defer taxes and having more capital to compound. (A Roth IRA or Roth 401(k) eliminates the taxes during accumulation and withdrawal)

Certain types of assets should be held in taxable accounts, while others should be in tax-qualified accounts to shield their dividends and income from being subject to current income taxes. Mutual funds and ETFs that may distribute long-term or short-term capital gains annually deserve special attention since the owner doesn’t control the timing of those distributions. Whereas municipal bonds are tax-free from federal income tax and can also be state tax free, so they belong in a taxable account.

Below are some guidelines for which type of holding is best for each type of account.

Interest income and foreign dividends are taxed at your ordinary income rate, which can be as high as 39.6% for Federal taxes. Qualified dividends (generally from US companies) and long-term capital gains receive favorable tax treatment. These are taxed at 15%, 20%, or 23.9% (depending on your tax bracket).

Thoughtful planning will lead to holding tax-efficient investments in taxable accounts and less tax-efficient investments in tax-advantaged accounts, so that an investor will get to keep more of their returns.

(We do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.)

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