3 Great Investments To Include In Your Traditional IRA | Personal finance

(Adam Levy)

As you put your retirement portfolio together, you may have some assets spread across a 401 (k), taxable account, and IRA. The types of accounts you use to invest in each type of asset can have a significant impact on your after-tax returns.

If you use a traditional IRA in your retirement planning, you should consider prioritizing the following three types of investments in that account.

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1. REIT

REITs, or real estate investment funds, pay 90% of their taxable income as dividends to shareholders. Due to their business structure, they do not have to pay corporation tax on those earnings. Unfortunately, this means that shareholders must pay regular income tax on REIT dividends instead of the lower qualifying dividend tax rate.

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If you hold your REIT shares in an IRA, however, you won’t have to pay any taxes on those dividends. Of course, you will eventually pay income tax when you take distributions from your IRA, but you should be able to pay a lower tax rate on retirement distributions than you would if you paid income tax on dividends while you were staying. working.

You can get the same benefits in a Roth account, but the Roth is best suited for businesses with the highest expected return. REITs generally offer halfway expected returns. If you are investing in a REIT that you believe has high total return potential, consider a Roth instead.

2. Corporate bonds

Corporate bonds suffer from the same tax problem as REITs. Interest payments on these bonds are taxed at the normal income tax rate if you hold them in a taxable account. You can protect yourself from that tax burden by keeping them in a tax-protected account like an IRA.

Again, the idea is that the income tax rate will be lower in retirement than the marginal tax rate during the working years. Additionally, the total return expectation on bonds is typically lower than that of other asset classes such as stocks, so you may not want to prioritize them in a Roth account. That said, junk bonds (so known because of their higher default risk) can produce a high total return, and investors might consider keeping them in a Roth account as well.

3. Complements to your 401 (k)

While a 401 (k) is a great retirement account with many benefits, one drawback of most 401 (k) plans is a limited number of investment choices. This can leave some holes in your wallet and you can probably fill them using an IRA. IRAs give investors much more freedom to choose their investments.

An example of an area where your 401 (k) might be lacking is in inflation-protected assets, such as TIPS. In fact, an IRA is a great place for TIPS because adjustments on TIPS are taxed as income each year, while an IRA will allow you to defer those adjustments.

Another situation could be that the offers of funds in your 401 (k) for a given asset class are simply much more expensive than others. If you can find a fund with a low expense ratio, you can purchase it in your IRA and invest more in your 401 (k) towards less expensive options.

Taking the time to consider where you invest in certain assets based on the options you have and the tax treatment of each will help you produce better after-tax returns without taking any additional risk.

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