The Right Stocks for Your IRA

"You must pay taxes. But there's no law that says you gotta leave a tip."
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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 ones to leave in regular (taxable) accounts.

For example, real estate investment trusts (REITs) like Simon Property Group (NYSE: SPG) normally don't qualify for the lower qualified dividend tax rate capped at 15%. Instead they are 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 Pfizer (NYSE: PFE), American Capital Strategies (Nasdaq: ACAS), and Southern Copper (NYSE: PCU). 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. (It should be noted that American Capital Strategies is a business-development company whose dividends are mostly non-qualified -- which makes it even more ideal for a tax-deferred account.)

On the other hand, low-yielding stocks or stocks that don't pay dividends at all, like NVIDIA (Nasdaq: NVDA), Genentech (NYSE: DNA), and Research In Motion (Nasdaq: RIMM) 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, so they're better off kept in a taxable account.

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 (and 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 you are away from retirement.

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 to the Rule Your Retirement service. To take advantage of our offer, just click here.

Todd Wenning wonders why you never see baby squirrels. He does not own shares of any company mentioned. Pfizer and American Capital Strategies are Motley Fool Income Investor selections. Pfizer is also a Motley Fool Inside Value pick. NVIDIA is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy has been accident-free since 1994.