Where you squirrel away your assets determines what you get to keep.
source: Bing Image Creator
Have you noticed our cute rodent friends in the backyard busily preparing for the coming winter? This time of year they’re hard at work gathering their assets in the form of acorns. Instinctively, they know that if they don’t prepare for the cold winter months, they’ll starve. So what do they do? They pull together their assets as efficiently as they can, then store them. But they don’t put them in any old place. No, somehow they know, it’s not just what they own; it’s where they own them.
source: Bing Image Creator
Millions of years of acting on acquired patterns have these furry creatures storing their nuts in the caves of carved out holes in your trees. Hidden from birds and other predatory creatures, they can draw down these assets, safe from outside forces in their environs. It’s not just about owning these assets; it’s all about where they own and store them for the most efficient use.
Reals Estate: Location, Location, Location
source: Bing Image Creator
In real estate, it’s all about location. In fact the mantra has always been “location, location, location” for as long as properties have traded hands. In other words, it’s not just what you own; it’s where you own it. The most prestigious location with the best schools will always bring the highest prices for the homes located there.
Well, when we think about equities, the same rule applies, but in a different context. Here, it is in which accounts you place your different assets that makes all the difference between what you earn and what you keep, after taxes. This takes account the effects that local, state and federal taxes have on your tax outcomes.
Ways to Minimize Your Annual Tax Bite
Asset location — choosing which kind of accounts will house a given asset — can have a big impact. It’s not just what you own; it’s where you own it.
One common practice is to place investments that generate high levels of taxable income, such as bonds or CDs, in tax-advantaged accounts like IRAs or 401(k)s. That allows investors to defer taxes on earned interest until withdrawals are made.
Only when required minimum distributions are required by law will you first begin to pay taxes on those withdrawals. Before that, assets in these accounts can earn interest from high yield savings accounts, CDs or bonds and compound your returns for years before you are mandated to take distributions in retirement. They completely escape tax during this period. This is otherwise referred to as tax deferred income and contributes mightily to the compounding of returns available to investors.
And if you place any assets in Roth IRAs, you’ll never have to pay taxes on distributions. You will, however, pay tax on these amounts before you place them in such accounts.
Dividend stocks, whose income is subject to the lower capital-gains rate, and muni bonds, which are typically exempt from federal taxes, are better suited for taxable accounts. Since you already get tax exemption from this type of municipal bond income, deferral of tax is of no concern; taxes on this type of income is deferred forever.
In addition, most local and some state municipal bonds generate interest that is exempt from all local, state and federal tax.
This triple tax-exemption is best appreciated when these types of assets are located in taxable accounts. All of the interest is yours to keep. It’s not what you earn that counts; it’s the amount you keep.
Your Takeaway
Just as the transition to retirement creates many questions, the decision surrounding where to place your assets presents opportunities to plan for the tax consequences that follow in retirement. But if you plan your income-investing strategy carefully, you’ll never have to worry about where your next paycheck is coming from. Just like our industrious furry friends, we too can prepare for the coming winter and place our assets in appropriate accounts and never starve.
Retirement: One Dividend at a Time is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
My Real Time Portfolio Trackers and stock market investment applications to enhance your investing returns and income are available here.
Stock Market Investing Applications
To date, subscribers to my investment newsletter, “Retirement: One Dividend at a Time” who faithfully mirrored our portfolio have attained annual dividend income over $132,000.00.
You are welcome to a free, two-week trial to my investment newsletter, “Retirement: One Dividend at a Time”. Just shoot me an email and request your free trial, at [email protected]
To receive notice whenever I publish new articles, simply click the follow button at the top of the article next to my name. Better yet, also click the “Subscribe” button and you’ll receive an email notifying you whenever I publish. Thank you.
So glad you can join me here today. Please consider becoming a paid subscriber of my Substack community so we can do even more.
The first 10 annual subscribers this week will receive the RODAT Portfolio Income Tracker ($99.99 retail value) which will reveal every RODAT stock in our subscriber portfolio, share counts and dividend amounts. With this digital tool, you may track the portfolio and mirror your own portfolio with the names you find suitable for your needs.
In addition, the first 10 annual subscribers this week will receive the digital Stock Market Investing Tool of your choice ($99.99 retail value), many of which are in real time and will greatly enhance your potential for capital gain and dividend income.
Make your complimentary choice here.
For just $5 per month, or $50 annually, you’ll receive full access to every article I write, complete access to my entire archive of articles, access to a special chat group of similarly minded investors and deep-dive articles for paid subscribers only, with recommended dividend growth stocks to supplement your Social Security benefit.
If you found value in this article and would like to support my efforts, please consider buying me a coffee, here.
buymeacoffee.com/georgeschneider
Subscriber now: buymeacoffee.com/georgeschneider
Discover my archive of articles on Substack, here.
Other articles you may find valuable reading:
This Perpetual Money Well Never Runs Dry
Stay Sane When the Markets are Going Insane
What If No One Ever Sold Even One Share of Stock?
Best,
George Schneider
Founder and publisher
Retirement: One Dividend At A Time
Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.
Disclosure: I am long all RODAT Portfolio names. The Portfolio continues to build dividend income with reliable, dependable equities which have long histories of increasing the dividend.
Copyright ©2024, George Schneider