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Short Summary
Main recommendation: Put your highest-growth assets in a Roth IRA and lower-growth assets in a traditional (pre-tax) IRA, a strategy called asset location. The speakers say this is because Roth growth comes out tax-free, while traditional IRA growth is taxed as ordinary income when withdrawn. REITs are a tricky case because their dividends are taxed differently from ordinary stock dividends.
Key Points
- Asset location means choosing which account type holds each asset, which is distinct from asset allocation (how much you hold in stocks, bonds, commodities, real estate, and so on).
- High-growth assets belong in a Roth IRA, because their eventual gains come out tax-free rather than as ordinary income.
- Lower-growth assets are better held in a traditional or SEP IRA, so you don't have to keep your RMDs as high.
- Growth inside a traditional IRA is fully taxable as ordinary income, not the reduced long-term capital gains rate.
- REITs can be high-growth, so they may fit a Roth, but their dividends are taxed as ordinary income unlike qualified stock dividends.
Details Worth Noting
- Concrete instructions:
- Sort your holdings by expected growth. Place the highest-growth assets (such as high-growth stock funds) in your Roth IRA.
- Place lower-growth assets (such as bonds) in your traditional or SEP IRA.
- If you can control what goes in each account type, follow this split. If you cannot, the speakers note that growth in a traditional IRA is still a good problem to have.
- Evaluate REITs separately: they can suit a Roth because of high growth, but compare the tax treatment of their dividends (ordinary income, though partly offset by the 20% qualified business income deduction) before deciding—acknowledging it's uncertain whether REITs end up better or worse off.
- In a regular brokerage account, most S&P 500 fund dividends are qualified and taxed at a lower rate than ordinary income, whereas REIT dividends are taxed as ordinary income.
- The speakers note that the qualified business income deduction on 20% of REIT dividends may or may not make REITs better off, depending on the individual situation.
- The speakers mention that asset location has come up on their show before, and both agree that the goal is to let the Roth grow as large as possible.
Bottom Line
Holding your highest-growth investments in a Roth IRA and lower-growth investments in a pre-tax account is the preferred approach when you have that choice, with REITs requiring a closer look at their dividend taxation.
