| As I always strongly recommend, talk to a tax professional if you have any questions. 1. Put Domestic Dividend Payers in Tax-Deferred Accounts If you are regularly collecting ordinary or qualified dividends or interest income from certain investments, put those investments in tax-deferred accounts if possible. If you have other stocks that don't pay dividends, you're better off keeping those in taxable accounts. The exception to this rule is if you are an active trader and have a lot of capital gains each year. You're better off having short-term positions in tax-deferred accounts since short-term gains are taxed at your ordinary income tax rate, which is higher than the 15% to 23.8% rate on your dividends. But for most investors, it's better to preserve space in tax-deferred accounts for dividend payers. And remember, if you're reinvesting the dividends from stocks held in a taxable account, you'll still have to pay taxes on the dividends even though you didn't collect any cash during the year. So make sure you have the funds to pay the taxes on the dividends. That brings up another reason to use a tax-deferred account for your dividend stocks: When you reinvest the dividends, you don't pay taxes on them until they're withdrawn, allowing you to compound that money for years without paying taxes on it. 2. MLPs Go in Taxable Accounts It's important that you keep master limited partnerships, or MLPs, in taxable accounts. The income from MLPs is mostly considered "return of capital," which is not taxable and lowers your cost basis. Here's how that works... If you buy a stock at $20 and receive a $1 distribution that is all return of capital (MLPs pay distributions, not dividends), you will not pay any tax on the $1 that you earned. Instead, your cost basis will become $19. If you later sell the stock at $25, you will pay taxes on $6 in capital gains rather than $5. There is generally no need to keep MLPs in a tax-deferred account (unless, as I explained above, you're actively trading them and consistently capturing capital gains). If you keep them in a tax-deferred account, they're taking up valuable space that would be more useful for a less tax-efficient investment. Furthermore, the distributions paid by MLPs sometimes contains unrelated business taxable income, or UBTI. If you earn $1,000 or more in UBTI in a tax-deferred account, you will be on the hook for taxes and possibly fees or penalties. 3. Foreign Stocks That Withhold Taxes Should Be in Taxable Accounts When you own stock of a U.S.-based company, you receive your dividend in total and then figure out later how much you owe the IRS. Foreign stocks are different. Many foreign governments dip their sticky hands into your dividends before you get them. For example, if you own a German stock, the German government will take 26.375% of your dividend before it hits your account. If you hold the stock in a taxable account, you will also owe U.S. taxes on the dividend, but the IRS will issue you a foreign tax credit equal to the foreign tax you paid, so you will essentially pay only one tax. Here's where it gets tricky, though: If you own the stock in a tax-deferred account, the foreign government will still take its share, but the IRS will not allow you a tax credit. So the money you paid to the foreign country is gone forever. Each country has its own withholding rate and rules. For example, Canada is unique in that it will take 25% of your dividend unless the dividend is in a tax-deferred account. Most other countries will still collect from the tax-deferred holding. Australia and New Zealand have among the highest withholding rates, at 30%. Chile, the Czech Republic, and Switzerland have the highest, at 35%. In China, the rate is 10%. The U.K. doesn't withhold any tax unless the investment is a real estate investment trust, in which case it's 20%. 4. Hold Bonds and Fixed Income in Tax-Deferred Accounts If you own bonds, CDs, or other taxable fixed income investments, they should be held in a tax-deferred account if possible. Interest income is taxed at your ordinary income tax rate, which is typically higher than the rate for dividends. Qualified dividends are taxed at 15% for most Americans. Those in the highest tax brackets will pay as much as 23.8%. | 
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