Many investors spend more time worrying about what securities to own and relatively little time considering where to own those securities. Specifically, they haven’t considered whether the security should be held in their IRA (or other pre-tax account) or if it should be held in their taxable account (after-tax account). This can be an expensive mistake given today’s tax environment.
High net-worth investors with large portfolios should locate more of their growth-oriented securities (stocks) in after-tax accounts and more of their income-oriented securities (bonds) in pre-tax accounts. The goal is to slow the growth of the IRA and ramp up the growth of the after-tax account. Here are three reasons why this makes sense:
For the reasons listed above, investors should locate more of their growth holdings (stocks) in after-tax accounts and more of their income holdings (bonds) in IRAs. Note that the goal is not to slow the growth of the overall portfolio. We want the overall portfolio to grow at the same rate. We simply want that growth to occur in our after-tax account and not in our IRA.
We hope this is helpful. Please let us know if you would like to discuss this strategy.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.