Put the Right Assets in Your Tax Shelter
Traditional and Roth Individual Retirement Accounts (IRAs) can offer exceptional tax shelter benefits for long-term investment assets. The pre-tax (traditional) and post-tax (Roth) accounts both allow investments to grow without taxation, and the Roth option also allows for tax-free withdrawals.
Because there are no annual taxes due in IRAs, assets that produce regular cash flows are particularly attractive options to include in such accounts. For example, high-interest bonds and high-yield dividend stocks provide cash flows that would typically be taxed every year in a standard brokerage account, lowering net returns and diminishing the powerful compounding effect of long-term investing. Since IRAs have an annual contribution limit, which in 2024 is $7,000, many investors have their portfolios allocated across several accounts that involve both IRAs and taxable brokerage accounts.
In a globally diversified portfolio, it can be advantageous to consider locating the assets that produce significant regular cash flows throughout the year, including some bonds and dividend stocks, in IRAs to avoid annual taxes on those cash flows.
- Tony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management
