Thanks to hopelessly convoluted tax laws and regulatory red tape that show no sign of being simplified, most investors are forced to house wealth in a wide variety of accounts that 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.
Doing so can give you a 20% advantage over those who don't.
An Easy Way to Maximize Your Returns
Most investors don't pay much attention to this and sadly, neither do a lot of professionals who are simply interested in using your money to generate their commissions.
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.
I think that stinks.
You deserve the knowledge to maximize returns by putting your hard-earned money into the right accounts.
Fortunately, this isn't as tough as it seems.
Take a look at this "efficiency" chart I made for you…
The "Tax Efficiency" Spectrum
Let's start with the type of accounts here.
Generally speaking, there are three:
- Taxable accounts: These include your plain vanilla individual or joint investment accounts, bank accounts, and money market mutual funds.
- Post-Tax accounts: Roth IRAs and 401(k)s fall into this category.
- Pre-Tax Accounts: Think of Traditional IRAs, 401(k)s, and 403(b)s.
And then there's seemingly a gazillion specific investment types, which is why I've arranged them in declining order from the most tax efficient to the least tax efficient.
Obviously, every investor'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 and more so 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 agreed upon a while back.
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 over the years – and my own accountants, too.
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.
Take dividend stocks, for example.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.