Stack rank asset classes by tax liability

[JJac]

I have about 20% of my investable money in 401k/IRA, and the rest is in a taxable account. I am planning my portfolio, and was trying to optimize for taxes, i.e. put the most taxable 20% of assets inside the 401k/IRA

I stack ranked various asset classes, from most tax efficient to least tax efficient, assuming all stock ETFs to minimize ongoing capital gains distributions. Is this the same order others would use?

Most tax efficient:
Precious Metals
Large Cap US
International Developed LC Equities
Small Cap US
Large Cap US Value
International Developed LC Value
Small Cap US Value
International Emerging Equities
Foreign REITs
Foreign Bonds
US REITs
TIPs
US Bonds
Commodities Futures
Least tax efficient

This basically says I should buy Commodities Futures in my IRA first, then US Bonds, and so on. I ranked Foreign REITs and bonds as being more tax efficient than US equivalents, because of foreign tax credits.

 

[lswswein]

Looks about right. Commodities are incredibly tax inefficient.

-h

 

[bpp]

I ranked Foreign REITs and bonds as being more tax efficient than US equivalents, because of foreign tax credits.

Foreign REITs are much less tax efficient than US REITs for a US taxpayer, due to their status as PFICs. I'd put them down somewhere around Commodities Futures.

I'm not sure that foreign bonds would be any more tax-efficient than domestic ones. I'd think if anything they would be less tax-efficient, because you're more likely to get hit with capital gains due to exchange-rate volatility -- though maybe that is a wash in the long run if you are careful to carry offsetting losses forward and backward as needed.

BTW, foreign tax credits don't confer tax efficiency; you're still paying tax, just to someone else. Though you can only make use of them in a taxable account of course.

Added: I think also that some (many?) countries don't tax non-resident holders of sovereign bonds, so depending on what kind of bonds you are holding, the foreign tax credit may not be much of a factor in any case.

 

[saluki9]

I guess high yield and high grade corporates don't get theirs?

 

[boutros]

Two things to note about precious metals being at the top. Precious metals are subject to a collectibles tax, essentially long term gains are taxed at 28%. If you are going to invest in a precious metals ETF such as GLD the ETF will be set up as a grantor trust and you will receive a grantor trust letter annually for tax filing. I cannot remember the exact onus of the grantor trust filing but I do remember buying the grantor trust ETF in an IRA to avoid it. Maybe someone better with taxes can discuss.

 

[Culture]

Precious metals are subject to a collectibles tax, essentially long term gains are taxed at 28%.

My understanding is that precious metal coins and bullion are considered regular investment assets and are not considered collectibles for tax purposes. Am I wrong?

 

[Martha]

My understanding is that precious metal coins and bullion are considered regular investment assets and are not considered collectibles for tax purposes. Am I wrong?

Yes. The mistake is often made because the IRS defines collectibles differently when it talks about what can and cannot be invested in an IRA. If not in an IRA precious metals and coins are taxed at the 28% rate (unless your ordinary income rate is lower).

Sorry, I could not find a simple link for you.

 

[Martha]

I should add that sales of collectables, including coins and bullion, may or may not be subject to a sales tax, depending on your own state's laws.

 

[saluki9]

Yes. The mistake is often made because the IRS defines collectibles differently when it talks about what can and cannot be invested in an IRA. If not in an IRA precious metals and coins are taxed at the 28% rate (unless your ordinary income rate is lower).

Sorry, I could not find a simple link for you.

It is in IRS Publication 550 or Code Section 1(h)(4)(A)(i)

 

[TromboneAl]

Here are two investments that are above Precious Metals in tax efficiency:

Paying off a mortgage or other loan
Spending for something that will save you money (insulation, more-efficient-fridge, etc.)

 

[Olav23]

Someone named Taylor posts on diehards and has this list which circulates, which is probably similar to yours:

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds