The biggest problem I see with financial “experts” on TV and the Internet are bad assumptions. The biggest bad assumption that annoys me to no end are “advisors” that don’t start the process by looking at things through a tax lens.
There are only two certainties in life: death and taxes.
Perhaps I am a bit jaded because I always end up paying huge sums of money to to the government in taxes but anyone that aspires to be “rich” some day should start learning how to invest with the first lens on taxation.
For example, if you had $400,000 to invest what would you invest in?
The question seems simple enough but if you don’t know if the $400k is in a taxable account, a Roth or an IRA/401k then you really can’t give anyone good advice about it because the tax consequences are different for each one.
If you took $400k in a taxable account and bought US Treasury bonds with it, the tax would be treated as ordinary income and that’s likely to be a much higher tax rate than if you had invested that money into an ETF or stocks that pay qualified dividends. Better yet, if you invested that money in a municipal bond ETF, the income would be tax free based on tax laws as of 2025.
I decided to ask AI to give me a comprehensive list of investments that should go into what type of account (taxable, IRA, Roth) to optimize for low taxation. Below is the response.
AI
⭐ = Excellent fit
✔️ = Good fit
⚠️ = Sometimes appropriate
❌ = Generally poor fit
| Investment Instrument | Roth IRA | Traditional IRA / 401k | Taxable Brokerage | Why |
|---|---|---|---|---|
| High-growth equities (individual stocks) | ⭐ | ✔️ | ✔️ | Maximize tax-free growth in Roth; long-term gains in taxable also efficient |
| Growth ETFs (S&P 500, Nasdaq, Total Market) | ⭐ | ✔️ | ✔️ | Very tax-efficient in taxable; still good in Roth for long-term compounding |
| Dividend Growth ETFs | ✔️ | ✔️ | ⭐ | Qualified dividends taxed favorably, making taxable solid |
| High-Dividend / Income ETFs | ✔️ | ⭐ | ⚠️ | Ordinary income taxed high—best in tax-sheltered accounts |
| Covered-Call ETFs (e.g., JEPI, QYLD, XYLD) | ⭐ | ⭐ | ❌ | Distributions taxed as ordinary income → keep in tax-advantaged |
| REITs / REIT ETFs | ✔️ | ⭐ | ❌ | REITs pay non-qualified dividends → best in IRA accounts |
| Bond ETFs (Treasury, Corporate, Aggregate) | ❌ | ⭐ | ✔️ | Bond interest taxed as ordinary income—best in IRA; Treasuries OK in taxable |
| High-Yield Bond ETFs | ⚠️ | ⭐ | ❌ | Heavy ordinary-income taxation |
| Municipal Bond ETFs | ❌ | ❌ | ⭐ | Tax-free interest → pointless in IRAs |
| Inflation-linked bonds (TIPS ETFs) | ⚠️ | ⭐ | ✔️ | Phantom income makes taxable less ideal but workable; IRA preferred |
| ROC (Return of Capital) ETFs (e.g., some option income funds) | ✔️ | ✔️ | ⭐ | ROC is very tax-efficient in taxable; neutral in IRAs |
| MLPs (Master Limited Partnerships) | ❌ | ❌ | ⭐ | K-1s + UBTI can cause tax issues in IRAs |
| International ETFs | ✔️ | ✔️ | ⭐ | Foreign tax credit available only in taxable |
| Emerging Markets ETFs | ⭐ | ✔️ | ✔️ | Higher growth potential → Roth friendly |
| Small-Cap Value ETFs | ⭐ | ✔️ | ✔️ | High expected growth/premium → maximize in Roth |
| Commodities ETFs (non-K-1) | ⚠️ | ⭐ | ❌ | Section 1256 contracts create complex taxable reporting |
| K-1 Commodity Funds (e.g., PDBC) | ✔️ | ⭐ | ⚠️ | Tax-efficient structures but can generate ordinary income |
| Preferred Stock ETFs | ✔️ | ⭐ | ⚠️ | Many distributions are non-qualified |
| BDCs (Business Development Companies) | ❌ | ⭐ | ⚠️ | Heavy ordinary-income distributions |
| Annuities | ❌ | ⚠️ | ⭐ | Tax deferral redundant in retirement accounts |
| Crypto (spot holdings) | ⭐ | ✔️ | ✔️ | High growth potential → optimize in Roth |
| Crypto yield products | ✔️ | ⭐ | ❌ | High-tax ordinary income from yield |
| Private equity / Venture capital | ⭐ | ✔️ | ⚠️ | Illiquidity makes Roth favorable for long-term tax-free upside |
My Thoughts
Once again, I love AI’s ability to do all the “homework” and summarize it nicely. If I had to do this manually, it may have taken me a couple of hours or longer but AI did it in minutes.
As you can see from the list, the best place for $400k in a taxable account would be annuities, international ETFs, MLPs, ROC ETFs, Municipal Bond ETFs, and/or Dividend Growth ETFs.
I took it a step further and asked AI to generate a portfolio and it gave me the following:
- SCHD $120k (low tax because of qualified dividends)
- VYM $80k (low tax because of qualified dividends)
- VTEM $120k (tax free income)
- HYD $80k (tax free income)
The annual yield would be 3.44% and generate $13,760 in income however it is a tax optimized (for this generic example) portfolio. To get the same amounts in a non-optimized portfolio you would need to generate $19,000 in a tax inefficient portfolio.
The most important thing to pay attention to in that table are the ❌ and avoid investment instruments in those account types.
Share The Wealth
What do you think of the table? Are you tax optimizing your investment portfolio? Let me know in the comments below.