Saturday Critical Action – Invest Your Taxable Account Thoughtfully

by | 17Mar2018 | Critical Actions, Investing, Investments | 0 comments

Welcome to the Saturday Critical Action. Each Saturday we take the weekly action from Jonathan Clements‘ blog Humble Dollar and “militarize” it for you. Jonathan Clements is a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get…free. Here is this week’s critical action:

INVEST YOUR TAXABLE ACCOUNT THOUGHTFULLY. If you purchase the wrong investments in your taxable account, you may be reluctant to sell, because you’ll trigger capital gains taxes. A good choice: low-cost U.S. and international total stock market index funds, which should be tax-efficient—and which shouldn’t ever lag far behind the market averages.

Once you fill up your Thrift Savings Plan and fund IRAs, most military members will have run out of tax-advantaged options to hold their investments. Your significant other might have a retirement account you can use, or you might have some income on the side that opens up other options to you. If you don’t have any of these options but still have more money to invest, using a regular, taxable investing account is what you’re left with.

Investing thoughtfully in a taxable account involves learning about asset location. Not asset allocation, but asset location. Which assets in your portfolio should be in a tax-advantaged retirement account? Which shouldn’t? For which investments doesn’t it matter?

Here is a great page to read that spells it all out for you. Here’s a taste that agrees with Mr. Clements’ critical action above:

Some fund types, like total market stock index funds, are extremely tax-efficient, because they produce low dividends (that are mostly qualified) and capital gains. By contrast, bond funds can be extremely tax-inefficient, because the interest they produce every year is taxed at your full marginal tax rate. Other tax-inefficient investments are REITs, small value funds, and actively managed funds that frequently churn their holdings. Put tax-inefficient funds into tax-advantaged accounts to the extent possible.


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