Recs

1

The Right Stocks for Your IRA

"You must pay taxes. But there's no law that says you gotta leave a tip."
-- Advertisement

You work hard for your money, and you take the time to make proper investments for your future, so you deserve to fully enjoy the profits of your decisions.

Minus Uncle Sam's cut, of course.

Look, we can kick and scream about it all we want, but we have to pay taxes on our investments at one point or another. The secret is not overpaying, so that you keep more of what's rightfully yours.

The high-net-worth clients I used to work with knew this, and they made reducing their tax liabilities Priority No. 1. There's a reason they're rich, after all.

But you don't need to keep an accountant on retainer to manage your investment taxes; you just need to practice smart "asset location."

No, that's not a typo
What I mean by "smart asset location" is knowing which investments to put in retirement accounts like IRAs and 401(k)s, and which to leave in regular (taxable) accounts.

For example, dividends from real estate investment trusts (REITs) like Kimco Realty (NYSE: KIM  ) typically don't fully qualify for the lower qualified dividend tax rate, capped at 15%. Instead, they are usually taxed at your regular income tax rate, which could run as high as 35%. Therefore, REITs are best kept in tax-deferred retirement accounts.

Also best kept in tax-deferred accounts (at least until retirement) are high-yielding stocks like Exelon (NYSE: EXC  ) , Wells Fargo (NYSE: WFC  ) , Duke Energy (NYSE: DUK  ) . True, these companies' dividends generally qualify for the lower tax rate, but if you have a long-term time horizon, are years away from retirement, and want to take full advantage of dividend reinvestment, it would be wise to defer those taxes.

On the other hand, low-yielding stocks or stocks that don't pay dividends at all, like Marvel Entertainment (NYSE: MVL  ) , Google (Nasdaq: GOOG  ) , and Trina Solar (NYSE: TSL  ) are best kept in non-retirement accounts. The point of owning these fast growers is price appreciation, and you aren't taxed on capital gains until you sell. Even then, if you've held the stock longer than one year, the long-term capital gains tax rates, currently capped at 15%, are lower than your income tax rate.

But wait, there's more ...
So there you have it: The right stocks for your IRA are REITs and dividend payers that you plan to hold for long periods of time (so long as you'll reinvest those dividends).

Of course, your portfolio probably contains investments other than individual stocks, like mutual funds, bonds, and TIPS. You'll want to determine the proper asset location for those as well, which will depend on current tax laws (which seem to change with the winds) and how far away from retirement you are.

It's something worth keeping tabs on; having all your investments in their proper location could save you thousands of dollars, and help you make the most of your retirement years.

If you're unsure of how to optimize your portfolio, Motley Fool Rule Your Retirement advisor Robert Brokamp recently detailed the best location for a wide range of investments. If you'd like to read that report, or have other questions about retirement planning, consider a free 30-day trial of the Rule Your Retirement service. To take advantage of our offer, just click here.

This article was first published June 14, 2008. It has been updated.

Todd Wenning wonders why you never see baby squirrels. He does not own shares of any company mentioned. Duke Energy is a Motley Fool Income Investor selection. Google is a Motley Fool Rule Breakers pick. Marvel Entertainment is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy has been accident-free since 1994.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 741429, ~/Articles/ArticleHandler.aspx, 10/31/2014 5:15:13 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 17,195.42 221.11 1.30%
S&P 500 1,994.65 12.35 0.62%
NASD 4,566.14 16.91 0.37%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement