The Best Investments for Taxable Accounts

With some care, you can simulate the tax deferral of traditional IRAs and 401(k)s. [Morningstar](?utm_source=eloqua&utm_medium=email&utm_campaign=newsletter_improvingfinances&utm_content=38210&elqTrackId=1f6f7460f572421080aabe97ba01fe79&elq=06e0ca95117b41ff8a3af54105a63126&elqaid=38210&elqat=1&elqCampaignId=17903) [Improving Your Finances] Improving Your Finances with [Christine Benz]( [Christine Benz] Taxable accounts don't carry the same tax benefits as IRAs and 401(k)s do; investors in them will pay taxes on dividends and taxable capital gains as they go along. Yet, taxable accounts don't carry the same strictures that those tax-advantaged accounts do. Importantly, there are no rules regarding contribution amounts or withdrawals. You also pay taxes on your gains in a taxable account at the capital gains rate, versus the ordinary income tax rate that applies to withdrawals from tax-deferred accounts. Those are some of the key reasons that I've written that [taxable accounts are underrated](. Moreover, with a little bit of care, it's possible to create a taxable portfolio that's incredibly tax-efficient, largely simulating the gains deferral that one gets with an IRA or 401(k). To help illustrate the key concepts, I've created [tax-efficient portfolios for retirees]( as well as [people who are saving for retirement](. On the short list of investment types that do a good job of reducing the tax drag in a taxable account are municipal bonds and equity exchange-traded funds. Individual stocks and traditional index funds also give investors a good deal of control over their tax bills. I [rounded up investment types to consider for your taxable account]( in this article. Another hot topic in the investment arena is whether actively harvesting losing securities from a portfolio, thereby booking tax losses to offset gains, can take tax efficiency to the next level. Improving tax efficiency is a key part of the sales pitch for what's called "[direct indexing]( individual securities in lieu of an index fund in an effort to net tax losses against gains. My colleague Jeff Ptak and I discussed direct-indexing systems with financial planning guru Michael Kitces in [the latest episode of our podcast, The Long View](. While Kitces thinks the direct-indexing concept holds great promise for other reasons, he provocatively stated that he thinks the purported tax benefits of such strategies are way overrated. The episode is worth a listen (or a read, via the transcript). Finally, if you've been questioning bonds' role in your portfolio amid their slide this year, you're not alone. Bonds haven't served the shock absorber role that they have in other recent equity selloffs, like March 2020. Given that, I appreciated [Amy Arnott's recent discussion]( of why bonds are still worth holding. With warm regards, Christine Benz [20 IRA Mistakes to Avoid]( From contributions to conversions to distributions, don't fall into these traps. [Read More]( Share: [facebook]( [twitter]( [linkedin]( ADVERTISEMENT [media]( [media] [Michael Kitces: Does Portfolio Customization Pay Off?]( The financial advice guru discusses his time-management hacks, the benefits and limitations of direct indexing, and the myth of fee compression in the advice space. [Listen Now]( [TIPS Versus I Bonds]( I Bonds boast tax advantages, but purchase limits reduce appeal. [Read More]( [3 Tax Strategies for a Bear Market]( Want to lower the taxes due on your portfolio? Here's how. [Watch Now]( [The Best Investments for Taxable Accounts]( With some care, investors can build a tax-efficient portfolio that’s diversified, too. [Read More]( Listen Now Get the latest investing insights and market updates with [Morningstar’s podcasts]( available on your iPhone, iPad, Android, PC, or smart speaker. Stay connected: [twitter]( [facebook]( [linkedin]( [instagram]( [YouTube]( [Apple News]( [View online]( | [See all newsletters]( | [Share your feedback]( [Unsubscribe]( from this newsletter. Or update your [email preferences](. © 2022 Morningstar, Inc. All Rights Reserved. 22 W. Washington St. Chicago, IL 60602