Ideal Placement Location for Investments: Taxable vs. Non-Taxable Accounts

One of the annual rituals that American taxpayers go through around this time of the year is the filing of taxes. So now is a good time to consider investment assets and their tax implications. For equity investors, it is very important to understand the tax consequences of investments since various asset classes are taxed differently based on where the assets are held.

For instance, taxable accounts such as regular brokerage accounts are best suited for some type of investments like foreign stocks(excluding some), stocks to be held for the long-term, ETFs, etc. Non-taxable accounts such as retirement accounts are ideal for holding instruments like REITs, short-term stock investments, etc. Since most REITs pay high dividends holding them in non-taxable accounts avoid taxes.If they are held in taxable accounts, then dividends will be taxed especially at the rate of ordinary income taxes and not the favorable qualified or non-qualified dividend tax rates.

Owners of foreign stocks have to pay careful attention to foreign dividend taxes and their impacts. Stocks from high tax countries such as Switzerland should not be held in non-taxable accounts since the taxes paid cannot be recovered. So a big chunk of dividends will be lost of taxes. Canada does not deduct this tax for stocks (excluding REITs) held in qualified US retirement accounts. So Canadian stocks are good candidates to hold for the long-term in non-taxable accounts like an IRA or 401-K account.

The table below shows the best placement location for various asset types:


Click to enlarge

Source:  The Importance of Tax-Efficient Investing by By Rande Spiegelman, April 3, 2017, Charles Schwab

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