Considered Responses: Asset Location

Problem:

Twenty-First Securities recently heard from a client who had decided to purchase several growth stocks and needed to decide whether to buy them for his Individual Retirement Account or for a “regular” (non-retirement) account.  The client believes that over the long term, growth stocks should gain value.  Because gains in IRAs are not taxed until withdrawal, he was leaning towards using that account.  Are IRAs the best “pocket” for growth stocks?

Solution:

The best vehicle for growth stocks is usually a non-retirement account.  If the stocks do appreciate and you hold them in an IRA, then, upon withdrawal, the profits will be taxed at ordinary income rates.  If those same equities were owned in your “regular” account, the profits would be taxed at the lower rate afforded to long-term gains. 

And what if a growth stock declines?  If you hold it in your regular account, then the decline will produce a capital loss, which you can use to offset capital gains.  But if you hold it in your IRA, you cannot realize that loss as a capital loss.

So if all other factors are equal, growth stocks should be held in a “regular” account. Conversely, we would advise that assets that create highly taxed stable income be included in your IRA.