4 Tips for Your Tax-Free Retirement Account

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Source: Thinkstock

Source: Thinkstock

Many investors have tax-free retirement accounts such as an IRA that allow them to accumulate assets and collect dividends and capital gains tax free. But not many investors know how to take advantage of this situation because they don’t know how taxes impact their investments. Here are four tips that you can use to take advantage of your tax-free retirement account.

1. Buy limited partnerships and REITS

Limited partnerships and REITs are special kinds of corporations. They don’t have to pay taxes, but they are required to distribute the bulk of their profits to shareholders in the form of a dividend. These dividends are not taxed like normal dividends, but rather as ordinary income. As a result they are priced accordingly. But since the market movers are those who are in the highest tax bracket they are priced thusly, meaning that if you are an investor with a small amount of income, or if you put these assets in a tax-free account such as an IRA, you are getting a bargain.

There are lots of these sorts of assets out there. Make sure you understand what the company does before you invest in it. Also make sure that the distribution is appropriate — i.e. make sure it is not too big. A good way to check for this is to make sure the company is not issuing additional shares or debt on a regular basis in order to make payments.

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