Invest with Taxes in Mind

There’s no getting around it: At some point, you’ll pay taxes on your investment earnings. While taxes alone should never drive your investment decisions, minimizing their impact is worthwhile.

What Goes Where

Holding tax-efficient investments in taxable accounts and taxable investments in tax-advantaged accounts is a useful strategy. Generally, when individual stocks, tax-managed stock funds and ETFs, dividend-paying stocks and mutual funds* are in a brokerage account, you’ll pay taxes annually on dividends and any realized investment gain.

Alternatively, assets invested in tax-advantaged accounts, such as 401(k) plans and traditional individual retirement accounts (IRAs),** taxes are deferred until you make withdrawals, when the money is taxed as ordinary income. Certain actively managed stock funds, taxable bond funds and REITs are also candidates for tax-deferred accounts.

Another Option

If you expect to be in a higher tax bracket in the future, converting a traditional IRA to a Roth IRA*** may be a good option. You’ll pay taxes on your savings in the year of the conversion, but all future earnings will be tax free once certain conditions are met. Consult your financial and tax professionals for guidance.

*Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money. Because mutual fund values fluctuate, redeemed shares may be worth more or less than their original value. Past performance won’t guarantee future results. An investment in mutual funds may result in the loss of principal.

**Distributions from traditional IRAs and employer-sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.

***Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax-free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Roth IRA distributions may be subject to state taxes.