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Author: VPSteve Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121217  
Subject: Investments in a Taxable Account Date: 9/28/2007 2:42 PM
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Are there better investments to hold in a taxable account, that is, better from a tax perspective?

I make the maximum contributions to my 401(K) and IRA each year but I also have additional money to invest.  Due to my income levels, I do not qualify for a Roth and my IRA contributions are "non-deductible."  Last year I was in the highest tax bracket and subject to the AMT, and my accountant's projection for this year puts me there also.

After doing some research on the fool.com website, I think I've come up with a list of good investments to hold in a taxable account and would like everyone else's opinion.

My list of investments for a taxable account are: Stocks (long term only), Stocks (that pay dividends), and Tax-exempt Munis.  Both long-term capital gains and dividends are taxed at a more favorable rate.

The investments to avoid would be: Bonds (Treasuries, Corporate, Non-tax-exempt), CDs, Money Market, etc.  As these all generate interest which is taxed at my income rate.

I'm sure I've missed something, anyone else have any ideas?

-=vpsteve
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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96052 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/28/2007 3:12 PM
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>> My list of investments for a taxable account are: Stocks (long term only), Stocks (that pay dividends), and Tax-exempt Munis.  Both long-term capital gains and dividends are taxed at a more favorable rate.

The investments to avoid would be: Bonds (Treasuries, Corporate, Non-tax-exempt), CDs, Money Market, etc.  As these all generate interest which is taxed at my income rate.
<<

That's the general idea.  Just keep in mind that REITs are also on the "avoid" list because their dividends are generally taxed as ordinary income. 

Also, if you live in a state with very high state income tax, Treasuries are "less bad" in a taxable account than other federally taxable bonds because they are exempt from state income taxes.

#29

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Author: vkg Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96053 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/28/2007 3:22 PM
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<i> Tax-exempt Munis </i>

Interest on tax-exempt Munis may or may not be exempt from AMT.  It is necessary to read the prospectus to know.   

Debra

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96057 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/28/2007 4:31 PM
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Publicly traded partnerships pay their dividends as returns of capital, which act to reduce your cost basis.  You aren't taxed on those until your cost basis reaches zero or until you sell the units (shares), by which time you've gone several years without being taxed on them.  I'd always rather pay tax later than sooner.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96064 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/28/2007 6:16 PM
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Publicly traded partnerships pay their dividends as returns of capital, which act to reduce your cost basis.  You aren't taxed on those until your cost basis reaches zero or until you sell the units (shares), by which time you've gone several years without being taxed on them.  I'd always rather pay tax later than sooner.

This is only partially correct. Publicly traded partnerships make cash distributions which are returns of capital. However, they also pass through  various types of income which are reported on Schedule K-1 at year end. You will pay tax on the pass-through income, regardless of whether you have received any cash during the year.

Ira

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96066 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/28/2007 6:22 PM
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Are there better investments to hold in a taxable account, that is, better from a tax perspective?

Don't let the tax tail wag the investment dog. For instance, in your list of investments, you suggest that tax-exempt munis are good while taxable bonds are bad. What's really important is the after tax yield on these bonds. Similar considerations apply to some of the other investments you have mentioned.

Ira

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Author: mrparrotfez Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96072 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/28/2007 8:55 PM
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Good point, Ira, thanks.

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Author: Sand105 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96088 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/30/2007 4:47 PM
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If you like Master Limited Partnerships and have substantial distributions you should opt for putting them in taxable accounts.  If they are in an IRA and you receive more than $1000 in distributions you will incur "unrelated business income tax" on that IRA. 

If you are sure to be under the $1,000 limit it really doesn't matter.

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 96090 of 121217
Subject: Re: Investments in a Taxable Account Date: 9/30/2007 5:51 PM
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If you like Master Limited Partnerships and have substantial distributions you should opt for putting them in taxable accounts.  If they are in an IRA and you receive more than $1000 in distributions you will incur "unrelated business income tax" on that IRA. 

If you are sure to be under the $1,000 limit it really doesn't matter.


This is "almost" correct. If you have more than $1,000 in unrelated business income, not distributions, from MLPs, your IRA will be subject to UBIT. The amount of UBI should be reported on the K-1 you receive.

Ira

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