Do you take taxes into consideration when allocating between taxable accounts and retirement accounts?


FutureAdvisor always seeks to optimize the portfolio by allocating tax-inefficient assets, such as bonds, REITs, and equity with a high dividend yield, in tax-sheltered accounts. However, it often is not possible to shield 100% of tax-inefficient assets, in which case a client may find the remaining quantity of bonds, et al, in their taxable account.

Current tax laws offer significantly better treatment on gains from stocks relative to most other investments with an average tax rate of 15% on long term gains and dividends. On the other hand, interest income from bonds, CDs, and REITs are taxed at your ordinary income tax rate. With very few exceptions, this will be higher than your capital gains tax rate.

So the problem with holding stocks in your IRA is that you lose the lower tax rate, because withdrawals from your IRA are ALL taxes at the ordinary income tax rate. And bonds in your taxable account are similarly inefficient because they'll be taxed every year at your ordinary rate on any interest they pay.

To sum it up, you'll pay less taxes in the short term but get the same long term growth by putting bonds and REITs in your IRAs when possible.