Placing Income Investments In Your IRA Before December 31?

With the upcoming tax increases approaching January 1, and with Congress still at a standstill about deciding who ‘deserves’ to keep their tax cut, it may pay for you to consider reallocating your investments now to maximize tax deferrals and avoid higher taxes in investment earnings.

Here’s what I’m talking about

Dividend tax rates will rise to 20% from their current rate of 15% at the federal level. For those of us in Massachusetts, our dividends will be taxed at over 25% when state taxes are counted. And for those of you in a high income tax bracket, your bond interest, CD interest, and other “ordinary income” will be hit with your highest marginal tax rate.

What can you do?

One technique that might counter some of these effects is to allocate assets between your IRA and non-IRA assets by how much income they produce. For example, and to keep this simple, let’s say you have 2 hypothetical accounts:

  • an IRA with $100,000 available to invest
  • a non-IRA brokerage account with $100,000 available to invest

And let’s say you’re a simple person 🙂 (simple in a good way) and you only wish to own 2 hypothetical investments:

  • ABC stock with 50% of your money which you plan to never sell and which pays no current dividend – it’s a growth stock
  • XYZ Bond with 50% of your money with you plan to hold for 20 years and reinvest the interest into more bonds from XYZ

How should you allocate these investments between your two accounts? First let’s do a quick quiz – let’s assume that currently, you own $100,000 of the bond in your brokerage account and $100,000 of ABC stock in your IRA. Is this a good set up?

In brief, likely NO. Why?

Your bond will distribute taxable interest, even if you reinvest (bond mutual funds work this way too – reinvestment does not defer tax). Since you are not using the interest, why pay tax on it now?

Your stock, by nature of you not selling it, won’t cause a taxable event (remember it’s not a dividend stock). So if you hold it long term, it’s like a tax-deferred account.

Therefore, it may make sense to own the bond in the IRA where the interest will be deferred of tax, and own the stock in the non-IRA brokerage account where it can grow tax deferred by not selling it.

Make sense?

If you’d like a comprehensive financial plan encompassing even more customized ideas to help you maximize your savings and net worth, get in touch with us. Here’s the scoop:

If you are facing a situation like this  and don’t know what to do, give me a call. We have helped people in many situations like this to inventory their assets and locate a competent insurance subject matter expert. If you would first like some questions answered give us a call – 781.393.0021 or send us a quick contact and we can go from there. Thanks for stopping by!

For more information about Chris Grande, Principal & financial planner, click HERE.

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