Non-Taxable Account Investments

In our previous post on Taxable Account Investments, we outlined the basics of taxable account investing along with some ideas on what to buy and what to avoid. In this post we will do the same but for non-taxable investments. Just in case you missed our last post, we will answer the following: what is a non-taxable account, why invest in a non-taxable account, and what to buy for your non-taxable account.

What is a non-taxable account?

There are a handful of non-taxable accounts out there, but in general people focus on The Big Three: 401(k), Roth IRA, and Traditional IRA. The 401(k) is something that is usually offered by your employer; the Roth and Traditional IRA are accounts you can open using brokerages like TD Ameritrade.

Why invest in non-taxable accounts?

  • Grow your wealth– the biggest advantage we see with non-taxable accounts is the ability to invest without worry of taxes eating into your gains. You can park your hard-earned money in a handful of investments and watch your wealth grow without the taxman getting involved in the process.

What to buy?

Here are a few investments to consider when investing in taxable accounts

  • REITs– this is a great investment for non-taxable accounts. The dividends with REITs are often quite generous, so it’s best to let those dividends build your wealth where they will have some tax protection. Check out VNQ with it’s 4%+ dividend.
  • Taxable Bonds – this is a good place to look toward corporate bond funds (LQD). If you’re willing to take more risk, you can also look to things like emerging market bond funds like EMB. For more risk adverse investors, look toward a broad market fund like BNDX.
  • Actively Managed funds– this is any type of actively managed fund that you prefer. These types of funds generally book a lot of short-term gains, which would rack up the tax bill if you held these types of funds in taxable accounts. Thankfully, in non-taxable funds, you can avoid all the short-term capital gains while enjoying the advantages of your chosen funds.

What to avoid?

  • Growth Stocks– any type of growth is great, but your non-taxable accounts really shine when the holdings in the accounts throw off gains in the form of dividends. You want to keep the growth stocks more in your taxable accounts and your dividend heavy holdings more in your non-taxable account.
  • Tax Managed funds– non-taxable accounts are already tax advantaged.  Holding tax-managed funds in the non-taxable accounts will be redundant. You can skip over these for the most part when making your non-taxable account decisions.
  • NOT CONTRIBUTING! – All jokes aside, the worst thing you can do is not take advantage of these accounts. They are there to help you invest for the future. Use them.

 

Leave a Reply

Your email address will not be published. Required fields are marked *