4 Tricks to Optimize Your Retirement Account
When you are preparing for retirement, it is a good idea to open up an IRA, given that you can grow your money tax-free until retirement. However, you are limited by the amount of money that you can put into one of these accounts in a given year, and so if you plan on saving more money for retirement you will need to, unfortunately, put money in an account that is taxed at the normal rate.
Because of this, your strategies for the two accounts should be different. Tax-free accounts have the obvious advantage of being tax-free, but you can milk the greatest benefit from this tax-free account by doing the four following things.
First, avoid municipal bonds and municipal bond funds in your tax-free account. The simple reason for this is that municipal bonds are not taxed at the federal level, and if you buy a municipal bond from your home state, your bond income is completely tax-free. This is a great advantage, but if you want to buy municipal bonds, make sure you do so in a taxable account. Otherwise, you’re wasting your limited tax-sheltered resources.
Second, buy stock in companies that have a tax advantage. Companies such as limited partnerships (LPs), master limited partnerships (MLPs), and real estate investment trusts (REITs) can avoid paying taxes if they distribute a certain percentage of their profits to shareholders (it is usually pretty high). The government allows this because these dividends are taxed as ordinary income at the individual level, which is a higher tax rate than the capital gains rate for most individuals in the stock market.
These aren’t necessarily bad plays for your regular account, especially since they avoid double taxation (that is, taxation at the corporate level and then at the individual level). But why not take full advantage and pay no taxes by putting these stocks in your tax-free retirement account? Just be sure to research these companies carefully, don’t chase yield, and be aware that these companies can cut their dividends and see losses just like any other company.