The Boost: Investing in taxable and tax-advantaged accounts

Among friends, it's common to discuss investing in hot stocks like Apple, NVIDIA, and Tesla. After all, they get a ton of media attention.

While it's fun to speculate on where they're headed, there are other proven ways to build wealth. One way is to to match certain investments with certain types of investment accounts.

You may have heard the famous story of Peter Thiel, the PayPal billionaire, who allegedly used a Roth IRA to make early investments in startups like Facebook. By strategically using this tax-advantaged account, Thiel was able to amass over $5 billion completely tax-free!

🧠 What you need to know

Don't miss out on your own opportunities. Let's explore ways to optimize your allocation between taxable and tax-advantaged accounts with specific types of investments.

Taxable brokerage accounts

Taxable accounts include brokerage accounts where you pay taxes on dividends, interest, and capital gains. Here are some ways to optimize these accounts:

Dividends taxed at long-term rates

To reduce taxes on dividend income in taxable accounts, invest in stocks and funds paying "qualified dividends." These dividends are taxed at lower long-term capital gains rates (0-20%) rather than ordinary income rates.

Most stock and fund dividends qualify if held over 60 days around the ex-dividend date - the date by which you must have purchased the stock to receive the next scheduled dividend payment.

However, dividends from REITs and some foreign companies don't qualify and are taxed as ordinary income. Strategically holding qualified dividend payers in taxable accounts minimizes taxes on that income stream.

Municipal bonds

Interest from these bonds is often exempt from federal taxes, and sometimes state taxes, so there may be limited benefit to putting them in a tax-advantaged account.

Exchange-traded funds (ETFs)

If choosing between an ETF and a mutual fund, the ETF will often be more tax-efficient due to its structure.

Tax-efficient mutual funds

Some funds will provide capital gains distributions when they adjust their asset allocation, especially active mutual funds. Tax-efficient funds, on the other hand, are designed to minimize taxable distributions, thereby reducing your tax liability.

Remember hearing about Bitcoin's last crash or last new high? As with any volatile security, there is a higher likelihood for gains and losses. It can be advantageous to use crypto losses  to offset crypto or stock gains gains, thereby reducing your tax obligation. If you are holding cryptocurrencies for greater than a year, however, then you'll pay long-term capital gains tax just like with other investments.

Tax-advantaged accounts

With tax-deferred accounts, such as 401(k)s and traditional IRAs, appreciation and dividends grow tax-free and you don't pay taxes until you withdraw funds. Investments in tax-free accounts won't face taxes ever again.

Compounding is so powerful to building wealth and it's a lot more powerful when you can defer or avoid taxes. You may benefit from placing the below investments in tax-advantaged accounts:

Bonds and bond funds

Income from bonds and bond funds is taxed as ordinary income, which carries a higher tax rate and thus disproportionately benefits from a tax-advantaged account.

Dividends taxed at ordinary income rates

Real estate investment trusts (REITs) often have high dividends taxed as ordinary income, making them ideal for tax deferral. They do benefit from a a 20% deduction, however it's generally better to still keep them in tax-advantaged accounts.

Foreign company dividends and business development corporations are also taxed at ordinary income rates.

High-growth stocks

High-growth stocks are expected to appreciate more than the average stock, thus in a taxable account you'd potentially face higher taxes. In a tax-deferred account, these gains can be reinvested tax-free until withdrawal.

Futures contracts

Futures have complex tax treatments, with gains and losses treated as 60% long-term and 40% short-term. They are marked to market annually, which means their value is updated once a year, generating a taxable event.

🤝 How can Mezzi help?

By thoughtfully allocating your investments across taxable, tax-deferred, and tax-free accounts, you can unlock powerful ways to build wealth faster. Go beyond stock picking and optimize your taxes.

With Account Tags, Mezzi makes it easy to assess your portfolio holdings, concentration, and asset allocation between taxable and tax-advantaged accounts

You can also use Mezzi’s tax-loss harvesting and short- and long-term capital gains savings insights to further optimize your allocation and rebalance their portfolio.