The following is an excerpt from 10 Investments You Should Hold in an IRA
Whether you want him to be or not, Uncle Sam is one of your most important partners in your retirement planning.
The taxes you pay have a major impact on your effective returns … and in some cases might make the difference between retiring comfortably or just barely getting by. That’s why it pays to know what investments should go in different retirement vehicles, such as a 401k, IRA or Roth IRA.
Not all investment gains are taxed equally. Some are taxed at preferential rates — or allowed to defer taxes indefinitely — while others will cost you so much of your current income, you might mistake them for a vindictive ex-wife.
So, as important as asset allocation, it’s all for naught if you don’t take tax allocation into account.
If you’re like most Americans, your retirement savings are a mixture of tax-deferred IRA and 401k money, and good, old-fashioned taxable bank and brokerage accounts. Today, we’re going talk about how best to arrange your investments within those types of accounts in order to lower your tax bill.
Obviously, non-interest-bearing cash generates no taxable income and should therefore be held in a taxable account. The same holds true for low-turnover, buy-and-hold stock index funds. There’s no reason to burn valuable tax-free dollars on something that’s not going to generate taxable gains.
Your IRA dollars should be reserved for the highly taxed stuff.
So with no further ado, here are some of the investments you should always try to hold in an IRA if possible.
“Alternative investments” is something of a blanket term that can mean different things to different people.
To me, an alternative is anything other than the traditional asset classes of stocks, bonds or cash. But for many of my high-net-worth clients, this will generally mean hedge funds.
Due to the lousy yields on offer in the bond market, I’ve been using market-neutral hedge funds for accredited-investor clients. While volatility tends to be low, this usually comes at the cost of higher portfolio turnover, which is extremely tax-inefficient.
That makes them an obvious choice for an IRA.
You really should do your homework here, however, because certain assets can create tax headaches. Some funds generate unrelated business taxable income (UBTI), which can result in you having to file a tax return on behalf of your IRA. However, you can sometimes avoid this by buying the offshore version of the fund for your IRA.
Before you do this, make sure you discuss this with your financial adviser or with the fund’s general partner because every scenario is a little different. But as a general rule, a fund that is “tax safe” for an offshore investor will also be “tax safe” for a rollover IRA investor.
To finish reading, see 10 Investments You Should Hold in an IRA
Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
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