Best places for investments
There are different kinds of investment accounts—suchasroth and traditional IRAS and 401(k)s, as well as regular taxable accounts — and some are better suited for certain kinds of investments than others.
Traditional IRAS and 401(k)s accept pretax money, giving you an upfront tax break and taxing withdrawals in retirement at your ordinary income rate. Meanwhile, dividends from real estate investment trusts (REITS) and interest from most bonds are also generally taxed at your ordinary income tax rate, which could top 30%. So if you think you’ll be in a lower tax bracket in retirement, you might park investments with such tax rates in traditional retirement accounts. Or you could aim to avoid taxation on your gains completely by parking those investments in Roth accounts, which accept posttax contributions and offer tax-free withdrawals (if you follow the rules).
The tax rate on most dividends from dividend-paying stocks is currently 15% for most of us and 20% for high earners. Thus, you might invest in such stocks — especially ones that pay fat dividends — in Roth IRAS to eliminate taxation on them, or in traditional IRAS if you expect a low future tax rate.
If you expect any stocks, including dividend payers, to appreciate significantly over a long period, consider putting them in Roth accounts. If a stock soars in value over some years, you’ll be happy if you don’t have to pay any taxes on those gains. Roth accounts can also be good for investments that generate shortterm gains, which would face generally higher tax rates elsewhere.
Investments that might be made in your regular brokerage account include slower-growing stocks, as well as municipal bonds, which reward you with tax-free interest. Any gains from stocks held for more than a year in those accounts will face the longterm capital gains tax rate, which is currently 15% for most investors.
You probably can’t follow these guidelines completely in your investing life, but do keep tax implications in mind as you invest, and try to be strategic when deciding what investments to hold in various accounts.