ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area 2: Financial Planning
A taxpayer owns a diversified portfolio. They want to optimize 'asset location' for tax efficiency. Which asset is BEST suited for a Roth IRA?
A taxpayer owns a diversified portfolio. They want to optimize 'asset location' for tax efficiency. Which asset is BEST suited for a Roth IRA?
Answer options:
A.
Municipal Bonds
B.
High-growth Stock / REITs
C.
Index Fund (low turnover)
D.
Cash / Money Market
How to approach this question
1. Understand Roth Benefit: Tax-free growth and withdrawal.<br/>2. Strategy: Place assets with highest expected return or highest tax inefficiency in Roth.<br/>3. Evaluate Options:<br/> - Muni Bonds: Tax-free anyway. Bad for Roth.<br/> - Index Fund: Tax efficient (LTCG). Good for Taxable.<br/> - Cash: Low return. Bad for Roth.<br/> - High Growth/REITs: High return or high ordinary income. Best for Roth.
Full Answer
B.High-growth Stock / REITs✓ Correct
High-growth assets benefit most from the tax-free compounding of a Roth IRA. REITs are also good candidates because they produce non-qualified dividends (ordinary income), which are shielded in the Roth.
Common mistakes
Putting tax-free assets (munis) in a tax-advantaged account.
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