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Tax Planning Strategies for Investors

Asset Location Strategy

Asset location—which investments to hold in which account types—can add 0.5-1.0 percent annual return through tax efficiency. The general rule: hold tax-inefficient investments in tax-advantaged accounts and tax-efficient investments in taxable accounts. Bond funds generate ordinary income taxed at rates up to 37 percent—hold them in a Traditional IRA or 401(k). REITs distribute non-qualified dividends also taxed as ordinary income—keep them in tax-advantaged accounts. Total stock market index funds generate mostly qualified dividends (taxed at 0-20 percent) and long-term capital gains—these are appropriate for taxable accounts. Municipal bond funds are most valuable in taxable accounts because their interest is already tax-exempt.

Tax Planning Strategies for Investors

Asset Location Strategy

Asset location—which investments to hold in which account types—can add 0.5-1.0 percent annual return through tax efficiency. The general rule: hold tax-inefficient investments in tax-advantaged accounts and tax-efficient investments in taxable accounts. Bond funds generate ordinary income taxed at rates up to 37 percent—hold them in a Traditional IRA or 401(k). REITs distribute non-qualified dividends also taxed as ordinary income—keep them in tax-advantaged accounts. Total stock market index funds generate mostly qualified dividends (taxed at 0-20 percent) and long-term capital gains—these are appropriate for taxable accounts. Municipal bond funds are most valuable in taxable accounts because their interest is already tax-exempt.