1 Must-Do for Your Retirement Portfolio

If your stocks are in the wrong accounts, it can cost you tons of your hard-earned profits over the long run.

Apr 26, 2014 at 9:25AM

In investing, there are three basic types of accounts in which you can buy stocks: tax-free, tax-deferred, and taxable. Tax-free accounts mainly include Roth IRAs. Traditional IRAs, 401(k)s, and some other types of accounts are tax-deferred, meaning that you can deduct contributions and are not taxed on dividends every year, but rather on distributions. Finally, most investment accounts that allow you to deposit as much as you'd like and withdraw whenever you want are taxable. 

While both types of retirement accounts have their own tax advantages, Roth IRAs are without a doubt the best choice for dividend investing. Let's take a look at the difference tax-free investing could make for your investment returns over time.

Don't waste room in your tax-free account!
While it can be lucrative to hold growth companies and other stocks that pay very little in the way of dividends, it can be a waste of your tax advantages in your Roth IRA. Sure, you'll get out of paying capital-gains tax when you sell, but the real advantage of tax-free investing is allowing your dividends to compound without being taxed.


Source: Flickr user 401(k) 2012.

Let's say that you invest $10,000 in a growth company that appreciates in value by 15% per year, on average over a 30-year period, and that you buy shares in a normal (taxable) brokerage account. This would result in an ending value of just over $662,000, and your only tax liability would be to pay capital gains tax when you sell, which is currently 15% for most tax brackets. In other words, you would walk away with about $563,000 after paying taxes on your gains.

Whatever you do, don't pay taxes on your high-yielders and bonds!
The space in your Roth IRA is limited because of the maximum allowable contribution of $5,500 per year. So your high-dividend investments should get first priority because of the powerful effects of tax-free dividend compounding.

For instance, let's say you invest in a high-dividend stock such as a mortgage REIT or a business development company. For comparison's sake, let's say that the stock returns the same 15% annually as our growth example, except that 10% is in the form of dividends and 5% is share price appreciation.

Here's where the tax treatment really makes a difference. If you were to buy a high-dividend stock like this in a traditional account, not only would you be liable for any capital gains when you sell, but you would also be required to pay taxes on the dividends you receive each year. Assuming your dividends are taxed at 15% (it could be more depending on the tax treatment of the particular company), this would leave you with an ending value of just under $447,000 after 30 years -- and this is before you sell and have to pay taxes on the share price appreciation. After paying capital gains tax, you could be left with less than $380,000!

Taxable vs. Non-Taxable Investment Performance | Create Infographics

So buying our high-dividend investment in a taxable account cost us more than 32% of the gains we would have been entitled to keep if we held our shares in a Roth IRA. Holding a growth stock in a traditional account costs nothing in taxes until you sell. I'd say that a $215,000 difference in your portfolio is worth spending some time on getting the allocation of your stocks right!

Prioritize accordingly!
A good exercise here would be to make a list of all of the investments in your portfolio in order from highest to lowest dividend yield. Those stocks with the highest yields should absolutely have highest priority for space in your Roth IRA. If necessary, it might be a good idea to make some adjustments. It may cost you a few bucks in commissions to reallocate your stocks between accounts, but it will pay off in the long run to have your dividend stocks in the right place.

Another great tax loophole you need to take advantage of
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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