The Best Way to Cut Your Taxes in 2013http://www.fool.com/retirement/iras/2013/01/24/the-best-way-to-cut-your-taxes-in.aspx Dan Caplinger
January 24, 2013
With a relatively favorable resolution to the portion of the fiscal cliff dealing with scheduled tax increases, the vast majority of taxpayers will see little or no change in their overall income tax liability. But no one wants to pay any more tax than you absolutely have to.
One smart way to cut your overall tax bill is to take maximum advantage of tax-favored accounts like IRAs and 401(k)s. But it's not enough just to have those accounts in your investing arsenal; you also have to use them to their full capacity. Simply by paying attention to how you allocate assets among various types of accounts, you'll go a long way toward getting your tax bill as low as it will go.
The pros and cons of IRAs
But traditional IRAs and 401(k)s don't let you off the IRS hook forever. Once you start taking withdrawals from your account, you'll have to include those withdrawals as income and pay taxes on it. Worse still, those withdrawals are all taxed at your maximum ordinary income rate -- regardless of where that income came from.
Where to put your investments
1. If it generates ordinary income, put it in an IRA.
For instance, dividend investors love the income that mortgage REITs Annaly Capital (NYSE: NLY) and American Capital Agency (NASDAQ: AGNC) produce, but what many don't realize is that those payouts generally don't qualify for the lower dividend-tax rates. With yields of 12% to 16%, you could pay between 5% and 7% of the value of your shares each year in taxes alone. But by putting them in an IRA, you can save that amount, and then hopefully qualify for a lower rate when you take the money out after you retire.
2. Keep low-income buy-and-hold stocks in taxable accounts.