Best Holdings For Your Roth IRA
A Roth IRA surely has some disadvantages when it comes to present-day tax planning.
The most obvious is that contributions made to a Roth IRA are not tax deductible, nor do they reduce income levels (there are others, sure).
However, a Roth IRA presents plenty of tax sheltering opportunities for long-term investors in that investments can grow, dividends can be paid and interest earned all without triggering a tax liability for the investor, in most cases.
Ultimately people will invest in an IRA, and a Roth IRA for specific tax-related reasons.
For the Roth IRA, it seems evident that the most obvious reason to invest would be tax-sheltered growth and earnings.
In fact, this is indeed the most popular reason why people invest via this vehicle.
And with new conversion rules, which allow people to convert traditional IRA accounts to Roth IRA accounts in 2010 without have to pay the full tax burden at once, it may actually be that more and more people start shifting part or all of their investments to Roth IRA accounts.
But what a lot of people fail to consider with IRA accounts is what the best holdings should be in this type of account.
As far as tax efficiency is concerned, holding investments that generate earnings that are taxed at regular income rates should be held in a Roth IRA (or even a traditional IRA for that matter).
The most obvious type of earnings are then interest paid on bonds and dividends paid by corporations (even though some foreign countries will start withhold taxes for these earnings - so stick to domestic securities to be safe).
With this in mind (holding securities that earn at regular tax rates within your IRA), that means that investments that actually grow may not be favorable holdings when you look at investing within your IRA account.
Could this be accurate? Not necessarily.
If you are planning on holding growth oriented investments for less than one year, then the IRA would help (capital gains earned on investments held for less than one year are treated as regular income).
Also, if your earnings in retirement are expected to be high, then holding even long-term growth investments outside of an IRA could have serious tax consequences, making the IRA a favorable way to invest securities that even offer great tax advantages.
How does this answer the question about the best holdings to hold in your Roth IRA? If nothing else, it answers it with a question about current and future expected tax rates.
If you expect to earn less in retirement, then holding growth securities outside of your IRA is ideal.
If earnings are expected to be high, then holding any type of security in your Roth IRA is fine.
So it's a tax matter that can only be answered with another tax question.
The most obvious is that contributions made to a Roth IRA are not tax deductible, nor do they reduce income levels (there are others, sure).
However, a Roth IRA presents plenty of tax sheltering opportunities for long-term investors in that investments can grow, dividends can be paid and interest earned all without triggering a tax liability for the investor, in most cases.
Ultimately people will invest in an IRA, and a Roth IRA for specific tax-related reasons.
For the Roth IRA, it seems evident that the most obvious reason to invest would be tax-sheltered growth and earnings.
In fact, this is indeed the most popular reason why people invest via this vehicle.
And with new conversion rules, which allow people to convert traditional IRA accounts to Roth IRA accounts in 2010 without have to pay the full tax burden at once, it may actually be that more and more people start shifting part or all of their investments to Roth IRA accounts.
But what a lot of people fail to consider with IRA accounts is what the best holdings should be in this type of account.
As far as tax efficiency is concerned, holding investments that generate earnings that are taxed at regular income rates should be held in a Roth IRA (or even a traditional IRA for that matter).
The most obvious type of earnings are then interest paid on bonds and dividends paid by corporations (even though some foreign countries will start withhold taxes for these earnings - so stick to domestic securities to be safe).
With this in mind (holding securities that earn at regular tax rates within your IRA), that means that investments that actually grow may not be favorable holdings when you look at investing within your IRA account.
Could this be accurate? Not necessarily.
If you are planning on holding growth oriented investments for less than one year, then the IRA would help (capital gains earned on investments held for less than one year are treated as regular income).
Also, if your earnings in retirement are expected to be high, then holding even long-term growth investments outside of an IRA could have serious tax consequences, making the IRA a favorable way to invest securities that even offer great tax advantages.
How does this answer the question about the best holdings to hold in your Roth IRA? If nothing else, it answers it with a question about current and future expected tax rates.
If you expect to earn less in retirement, then holding growth securities outside of your IRA is ideal.
If earnings are expected to be high, then holding any type of security in your Roth IRA is fine.
So it's a tax matter that can only be answered with another tax question.
