Thanks to hopelessly convoluted tax laws and patchwork regulation - red tape that shows no sign of being simplified - most of us are forced to house our wealth in a variety of accounts. They can run the gamut, from fully taxable to fully tax-advantaged.
Choosing the right ones for your investments is critical.
In fact, I'd even go so far as to say that making sure your money is in the right type of account is nearly as important as the specific investments you pick.
That's because, when you get this right, you can enjoy an additional 10% to 20% advantage over those who don't.
The downside of ignoring this fact, of course, is twofold: diminished returns, and penalties from the government - sometimes both!
Naturally, Wall Street likes it this way, because it helps them "help" you by coming up with a never-ending litany of new products, new regulations, and, of course, new fees.
But don't worry.
Today I'm going to show you how to ensure that your investments are in the right accounts, so that you can maximize your returns immediately... and for years to come.
It's easy, too.
Take a look at this "efficiency" chart I made for you...
The "Tax Efficiency" Spectrum
Obviously, everyone's financial situation is unique, so there's a little wiggle room here. That's why there are no firm dividing lines in my chart.
What I am talking about is less a set of hard and fast rules than a starting point for discussions with your accountant or tax planning professional.
Take master limited partnerships (MLPs), for example.
They're great retirement investments because they are relatively isolated from the price of the underlying commodities they carry - oil and natural gas - while also showing remarkable stability and growth over long periods of time. And the income that's 5%, 6%, or even 10% isn't too bad either (which is why I've written about them frequently over the years).
Yet, they're terrible retirement account investments - a point investing personality Jim Cramer and I finally agree upon.
That's because if you put them inside your IRA or your 401(k), like many income-focused investors do, you'll miss out on legitimate tax breaks like depreciation, partnership expenses, and more because they aren't allowed in tax-advantaged retirement accounts.
Worse, you might actually get charged with additional taxes based on something called "unrelated business taxable income," which is what you'll pay when MLP cash distributions are unrelated to the income that gives it tax-exempt status in the first place.
You'd think this would be one and the same, given that many investors hold MLPs for retirement, but it's not.
Our government, in its infinite wisdom, doesn't view oil and gas income as saving for retirement... despite the fact that that's exactly how millions of investors think about it. I know because I've had this discussion with thousands of subscribers around the world at seminars over the years.
Long-term investments are another area of great confusion - and a source of widely divergent opinion.
I think they're better in post-tax accounts like the Roth IRAs, because you can withdraw income generated in the account tax-free. But many financial professionals advocate the exact opposite, because there are no gains until you sell, even though the dividends are taxed.
You could have similar discussions about real estate investment trusts (REITs), Treasury inflation-protected securities (TIPS), and everything from currencies to gold. Just about any investment you can think of comes down to your personal objectives. The concept of tax efficiency varies based on your personal situation.
Sharpen Your "Tax Edge" Regularly
In all fairness, this chart could be outdated the moment you read it, because our government is starving and hopelessly indebted. That's another way of saying it's desperate. So there are probably going to be plenty of changes in our tax laws in the years ahead.
Generally speaking, I think we're going to see more aggressive collections and even fewer minimized deductions. I expect the government to eventually rein in the tax-free distributions associated with Roth accounts at present. And I remain convinced that Uncle Sam will make a run at our 401(k)s - a controversial prediction I made a few years back that, regrettably, seems to be gathering steam in Washington.
Still, the point is not how or even whether I'm right about any of this.
What I want to hammer home is that taking a few minutes to organize your investments by tax efficiency can give you a significant edge immediately.
As in right now...
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