This Simple Chart Can Immediately Boost Your Profits by 20%

Keith Fitz-Gerald May 31, 2017

Thanks to hopelessly convoluted tax laws and regulatory red tape that shows no sign of being simplified, most investors are forced to house wealth in a wide variety of accounts that run the gamut from fully taxable to fully tax-advantaged.

Choosing the right ones for your investments is critical.

In fact, I’d even go so far as to say that making sure your money is in the right type of account is nearly as important as the specific investments you pick.

Doing so can give you a 20% advantage over those who don’t.

Here’s how to get started.

An Easy Way to Maximize Your Returns

Most investors don’t pay much attention to this and sadly, neither do a lot of professionals who are simply interested in using your money to generate their commissions.

Naturally, Wall Street likes it this way, because it helps them “help” you by coming up with a never-ending litany of new products, new regulations, and of course, new fees.

I think that stinks.

You deserve the knowledge to maximize returns by putting your hard earned money into the right accounts.

Fortunately, this isn’t as tough as it seems.

Take a look at this “efficiency” chart I made for you…

The “Tax Efficiency” Spectrum

Let’s start with the type of accounts here.

Generally speaking, there are three:

  1. Taxable accounts: These include your plain vanilla individual or joint investment account, bank accounts, and money market mutual funds.
  2. Post-Tax accounts: Roth IRAs and 401(k)s fall into this category.
  3. Pre-Tax Accounts: Think of Traditional IRAs, 401(k)s and 403(b)s.

And then there’s seemingly a gazillion specific investment types, which is why I’ve arranged them in declining order from the most tax efficient to the least tax efficient.

Obviously, every investor’s financial situation is unique, so there’s a little wiggle room here. That’s why there are no firm dividing lines in my chart.

What I am talking about is less a set of hard and fast rules, and more so a starting point for discussions with your accountant or tax planning professional.

Take Master Limited Partnerships (MLPs), for example.

They’re great retirement investments because they are relatively isolated from the price of the underlying commodities they carry – oil and natural gas – while also showing remarkable stability and growth over long periods of time. And the income that’s 5%, 6%, or even 10% isn’t too bad, either (which is why I’ve written about them frequently over the years).

Yet, they’re terrible retirement account investments – a point investing personality Jim Cramer and I finally agreed upon a while back.

That’s because if you put them inside your IRA or your 401(k), like many income-focused investors do, you’ll miss out on legitimate tax breaks like depreciation, partnership expenses, and more, because they aren’t allowed in tax-advantaged retirement accounts.

Worse, you might actually get charged with additional taxes based on something called “unrelated business taxable income,” which is what you’ll pay when MLP cash distributions are unrelated to the income that gives it tax-exempt status in the first place.

You’d think this would be one and the same, given that many investors hold MLPs for retirement, but it’s not.

Our government, in its infinite wisdom, doesn’t view oil and gas income as saving for retirement… despite the fact that that’s exactly how millions of investors think about it. I know because I’ve had this discussion with thousands of subscribers around the world over the years – and my own accountants, too.

Long-term investments are another area of great confusion – and a source of widely divergent opinion.

I think they’re better in post-tax accounts like the Roth IRAs, because you can withdraw income generated in the account tax-free. But many financial professionals advocate the exact opposite, because there are no gains until you sell, even though the dividends are taxed.

You could have similar discussions about real estate investment trusts (REITs), Treasury inflation-protected securities (TIPS), and everything from currencies to gold. Just about any investment you can think of comes down to your personal objectives. The concept of tax efficiency varies based on your personal situation.

Take dividend stocks, for example.

Generally speaking, most investors will find it more beneficial to put them in a retirement account because the cold hard cash that’s kicked off as part of the dividend process is otherwise taxed at the regular income tax rate if you don’t. That means you lose the benefits of tax-free growth.

Aggressive, high-growth stocks are the exact opposite.

I believe they’re best left in regular taxable accounts because they don’t usually pay big dividends so you don’t have to worry about higher tax rates at the higher income tax rate. What’s more, stocks sold in regular accounts can have more favorable capital-gains treatment over time than those sold in a retirement account and which are taxed at regular income rates. Even if you hit the “motherload” – which is, I submit, a great problem to have.

Sharpen Your “Tax Edge” Regularly

In all fairness, this chart and, indeed, this column, could be outdated the moment you read it, because our government is starving and hopelessly indebted. That’s another way of saying it’s desperate. So there are probably going to be plenty of changes in our tax laws in the years ahead.

I know President Trump has promised tax relief but I’ve never seen the government voluntarily decrease its income without a fight. That’s why I believe we’re going to see more aggressive collections and even fewer minimized deductions in the years ahead.

In addition, I expect the government to eventually rein in the tax-free distributions associated with Roth accounts at present. And, I remain convinced that Uncle Sam will make a run at your 401(k)s – a controversial prediction I made a few years back that, regrettably, seems to be gathering steam in Washington.

Still, the point is not how or even whether I’m right about any of this.

What I want to hammer home is that taking a few minutes to organize your investments by tax efficiency can give you a significant edge immediately.

As in, right now.

Until next time,


4 Responses to This Simple Chart Can Immediately Boost Your Profits by 20%

  1. Barry says:

    EXCELLENT- one should save this for reference and review


    • Keith says:

      Thank you, Barry!

      I am thrilled you find it valuable and am hoping that every member of the Total Wealth Family does exactly what you’re suggesting.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Dennis Brooks says:

    Thank you so much for the information. I immediately used it to evaluate my current status at the time. Immediately I found a couple of positions that by moving them improved my future tax liability. Thank you again. I have this printed and posted by my work station. I urge anyone reading this to take this seriously, take it to your professional advisor and evaluate your position. It will be your mistake if you don’t!

    • Nicholas Riso says:

      Hi Dennis,

      Thank you for being a part of our Total Wealth family! We appreciate your kind words and hope to continually provide you with relevant and useful content in the future.

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