With tax season ending, many investors are likely scrambling
to make one final IRA contribution for the 2012 tax year.
Yet despite the popularity of the investment vehicle, there is
still a great question of what type of security belongs in an
IRA. This problem is further confounded by
, as these have various product structures, tax treatments, and
other issues, each of which need to be considered for IRA
What type of ETF to put in an IRA?
Most agree that muni bonds are poor choices for IRAs,
suggesting that funds like
are out. That is because these are tax-favored securities that
don't pay any federal income tax anyway, so there is less
incentive to shelter these types of bonds.
Beyond that though, there is a great deal of debate on what
type of asset to put into an IRA. Some believe that growth
securities are better suited as they can grow tax-free in a Roth,
and if you taking gains off the table in a traditional IRA (but
keeping them in the account), there isn't a tax liability.
Others believe that higher yielding ETFs should be the top
holdings in your IRA instead. This is because for traditional
IRAs, income payments (that are kept in the account) grow
tax-deferred while Roth investors see tax-free (for the most
part) dividends and income payments.
This is extremely important as it can make a huge difference
over time thanks to compounding. This is particularly true given
the recent hike in taxes, both in terms of dividends and ordinary
income, suggesting that now more than ever is the time to
consider putting solid performing income products into a tax
sheltered account (see
3 Excellent ETFs for Income Investors
And in many cases, there are high yielding exchange-traded
products that pay out yield as ordinary income anyway. This type
of payout is already taxed at normal (39.6% top marginal level)
rates, so putting it into an IRA-either a traditional but
especially in the case of a Roth-is probably a good idea.
While there are definitely a number of choices out there that
fit this bill, we have highlighted three of our favorite higher
yielding ETFs in this category below. Any of these make sense to
us in a tax sheltered account, and especially for those who are
looking to bank on high levels of income in their portfolios:
PowerShares KBW Premium Yield Equity REIT Portfolio (
In order to avoid double taxation, REITs pay out the vast
majority of their income to unit holders. While this results in
big payouts, it also makes the income taxed at ordinary rates,
something that is generally a drawback, but isn't much of an
issue in a sheltered IRA account.
For this reason, it could be a good idea to look at any number
of REIT ETFs on the market for broad exposure to the space. While
there are a number of more popular choices like
, for the purposes of this article we think KBWY presents an
impressive opportunity (see
Top ETFs for the Real Estate Recovery
This is because KBWY follows a higher yield index for its
exposure, while still staying in the equity REIT segment (in
other words not venturing into the mREIT market). With this high
yield, KBWY could be a better IRA choice, especially considering
its 30-Day SEC yield is over 4.6%.
In terms of its portfolio, the ETF is a bit concentrated as
just 34 REITs are in its basket. However, assets among these
securities are well spread out, and there is a definite tilt
towards small caps so growth is very possible for this potential
For fees, the ETF is relatively cheap at 35 basis points a
year, although volume is a bit on the light side along with total
assets under management. However, it is worth noting that bid ask
spreads are still very tight for this fund, so total costs
shouldn't be too bad.
Credit Suisse Cushing 30 MLP ETN (
Some might question the pick of an MLP for an IRA. After all,
MLPs can require K-1s and if enough of them are held, a
declaration of unrelated business taxable income as well.
due to the ETN structure
, which is basically a debt instrument, these issues are
eliminated although income is taxed at ordinary rates.
Fortunately for those in an IRA, this doesn't really matter,
meaning that MLP ETNs could be a decent fit in a tax sheltered
account. While there a number of picks to like in the MLP world
such as higher risk leveraged ETNs like
, a more stable choice could be Credit Suisse's MLPN.
This note focuses on the Cushing 30 MLP index, which tracks
midstream MLPs which look to be less impacted by commodity
prices. Hopefully, this focus makes the fund a bit less volatile,
though the income is still quite high (also read
Boost Income and Growth with MLP ETFs
In fact, levels are currently coming in above 5% in 12-month
yield terms, although fees are a bit high at 85 basis points a
year. Volume is spotty as well, but observed bid ask spreads have
been relatively tight, so this shouldn't be much of a
And for investors who want to target MLPs in an IRA, this is
one of the few viable options. Other types of securities-and
especially individual MLP holdings-can suffer more burdensome tax
issues, making MLP ETNs like MLPN top choices for the IRA
PowerShares Senior Loan Portfolio (
Much like REITs, bonds are also interesting picks for IRAs for
many of the same reasons. Their income is also taxed at ordinary
rates, while bond ETFs do run into capital gains issues as
This is more-or-less irrelevant in an IRA though, suggesting
that fixed income could have a decent home in an IRA structure.
Particularly this is true in the junk bond ETF market as these
securities pay out huge amounts of income on a regular basis (for
another option see
HYLD: Crushing the High Yield ETF Competition
However, many investors are growing concerned about a bond
bubble building suggesting that fixed income might not be right
for all investors. Many of these worries though can be avoided by
targeting shorter-duration securities such as BKLN.
This relatively new ETF focuses on the senior loan market,
which is a subset of the junk bond world. However, bonds in this
category are 'senior' to other types of debt, while they also use
LIBOR for their yields.
This resetting yield feature helps to mitigate interest rate
risk and greatly reduce losses that would happen in a bond
bubble. And best of all, the product-despite having an average
years to maturity of just over five years-has a 30 Day SEC Yield
The fund also sees a great deal of interest from investors,
and has actually surged up the popularity charts so far in 2013.
So, the product should be easy to trade at a reasonable cost, and
with the high rate of low interest rate risk income, could be an
excellent long term pick for IRA investors.
Investors have a number of decisions to make when it comes to
their IRA, no matter if they possess a traditional or a Roth
version. There are also a number of conflicting opinions when it
comes to what to put in an IRA, but I like yield focused
That is because the income gets to grow tax-free in a Roth IRA
or tax-deferred in a traditional IRA. While this may not seem
like a big deal initially, saving this tax year in and year out
can really add up, and act as a huge catalyst for great returns
Three Great ETFs for Your IRA
This is especially true in the case of the three
aforementioned ETFs, as not only are they poised to do well in
today's market environment, but they pay out a great deal of
income as well. And since their income would be taxed at ordinary
rates anyway, holding them in a tax sheltered account makes the
most sense over the long haul for IRA investors.
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PWRSH-SNR LN PR (BKLN): ETF Research Reports
PWRSH-K PY REIT (KBWY): ETF Research Reports
CS-CUSHING 30 (MLPN): ETF Research Reports
ISHARS-SP NAMTF (MUB): ETF Research Reports
SCHWAB-US REIT (SCHH): ETF Research Reports
VIPERS-REIT (VNQ): ETF Research Reports
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