What are some investing strategies to take into account when working with a tax advantaged account such as a 401k/IRA versus a normal non tax advantaged account?

I know a big strategy is to buy and hold investments for a long time when dealing with normal accounts to limit selling and paying taxes. But in a Roth for example there shouldn't be any tax reason limiting you from selling and moving investments around if needed. This would give more flexibility and makes re-balancing much easier to deal with.

Are there any other important factors to consider when choosing allocations between the two?

1 Answer 1


There is no tax reason limiting you from selling and buying investments, in Traditional IRAs, 401k plans, 403b plans etc as well as their Roth versions since you don't have to pay capital gains on the transactions (but can't deduct the losses either).

But one thing to keep in mind is that ultimately when money is distributed from a non-Roth tax-deferred account, it comes out as pure income that is taxed at the then current rate without any of the special tax treatment that is afforded to capital gains, qualified dividends, etc.

Depending on where you are in your life cycle, it might be preferable to have a huge capital gain in a non-tax-deferred account and pay taxes (at reduced rates) on it right now rather than to receive the same gain in a non-Roth tax-deferred account and pay taxes on it as simple income when you take it out.

For Roth accounts, you will have paid taxes up front when the money went in, and withdrawals are tax-free so it is better to have the huge gain in the Roth rather than outside the Roth.

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