How to Use Traditional Retirement Accounts
Traditional Retirement Accounts are tax-deferred. This means you get a tax deduction when you put money in, and you pay tax when you take money out (usually in retirement). Most typically, these are your Traditional 401k and Traditional IRAs.
You should only put money in these accounts that you won’t need until retirement as the penalty for withdrawal is simply too high to pay.
If you also have Taxable and Roth investment accounts, you can optimize the investments you own in your Traditional accounts. Because Traditional Retirement Accounts are not being taxed currently, you’ll want to hold investments that pay higher dividends and capital gains. These are our higher turnover funds and funds that create higher levels of income.
Typically, this includes our fixed income and high yield investments along with large cap stocks which pay higher dividends.
Once again, your tax strategy should never overrule your risk tolerance, so you may end up holding some lower dividend investments in your tax-deferred accounts, but they should be minimized.
Investment allocation is more an art than a science.