Investing in Tax-advantaged Assets from Retirement accounts

Retirement plan tax rules (IRA, 401k) override the tax benefits of assets (stocks, bonds, ETFs, real estate) held in those accounts.

Some assets receive unique government tax benefits. Retirement accounts, such as IRAs, 401ks, and HSAs, also have tax advantages.

When investors (for various reasons) hold tax-benefit assets inside retirement accounts, some or all tax benefits may be lost or overridden by the retirement plans’ tax rules. In this post, we briefly summarize several such cases.

Stocks, bonds, mutual funds, ETFs

Investing in stocks, bonds, mutual funds, and ETFs from taxable accounts receive the following tax benefits:

• If the assets are held for over a year, realized gains are taxed favorably at 0%, 15%, or 20%. These rates are called long-term capital gains tax, which is lower than ordinary income tax.
• Realized losses could offset the gains. This also allows the implementation of a Tax-loss Harvesting Strategy.
• Qualified dividends are also taxed favorably.

Retirement accounts (IRA, 401k, HSA, etc.) override the above tax benefits and determine the…