At The Oxford Club, we hold the principle that true success in investing isn’t determined by how much you earn, but by how much you are able to retain.
Learned Hand, the esteemed U.S. federal judge, famously stated, “Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”
Yet, I find another of his quotations equally vital:
“There are two systems of taxation in our country: one for the informed and one for the uninformed.”
This underscores our mission to ensure you’re thoroughly informed. By structuring your portfolio for tax efficiency, you can retain every dollar you are legally entitled to keep.
Here are steps you can take to make sure you’re not handing over more to the IRS than necessary.
To start with, always seek advice from a tax professional if you have any doubts or questions.
1. Sheltering Domestic Dividend Payers in Tax-Deferred Accounts
If you’re earning ordinary or qualified dividends regularly from specific investments, it’s wise to place those into tax-deferred accounts wherever feasible.
In contrast, stocks that don’t distribute dividends are better suited for taxable accounts.
However, an exception exists for active traders who frequently realize capital gains each year. Short-term positions benefit from being in tax-deferred accounts since short-term gains attract your ordinary income tax rate, which is generally higher than the 15% to 23.8% levied on dividends. But for many investors, reserving space in tax-deferred accounts for dividend payers is more advantageous.
It’s crucial to note that reinvesting dividends from stocks held in taxable accounts still necessitates paying taxes on those dividends, regardless of not receiving cash that year. Hence, ensure you have the resources to cover these tax obligations.
Using a tax-deferred account for dividend stocks offers another edge: reinvested dividends accumulate tax-deferred until withdrawn, allowing for compounded growth over time without immediate tax impact.
2. Positioning MLPs in Taxable Accounts
Master limited partnerships, or MLPs, should ideally reside in taxable accounts.
Much of the income from MLPs is classified as “return of capital,” which isn’t taxable and reduces your cost basis.
Here’s how this breakdown works:
Imagine purchasing a stock at $20 and subsequently receiving a $1 distribution, which is entirely a return of capital (MLPs distribute, they don’t pay dividends). You won’t be taxed on this dollar received; instead, your cost basis drops to $19. Should you later sell the stock for $25, you’ll pay taxes on $6 in capital gains instead of $5.
It’s typically unnecessary to hold MLPs in tax-deferred accounts unless, as previously mentioned, you’re an active trader consistently reaping capital gains from them. In tax-deferred accounts, they can occupy valuable space that could better serve a less tax-efficient investment.
Additionally, MLP distributions sometimes include unrelated business taxable income (UBTI). Earning $1,000 or more in UBTI in a tax-deferred account could result in taxes and potentially additional fees or penalties.
3. Managing Foreign Stocks in Taxable Accounts
Owning a U.S.-based company’s stock means you receive your dividend upfront and later determine what’s due to the IRS. This isn’t the case with foreign stocks. Many international governments take a slice of your dividends before you see them.
To illustrate, if you own a German stock, the German government will snag 26.375% of your dividend before it lands in your account.
If you hold this in a taxable account, you’ll still owe U.S. taxes on the dividend, but you can claim a foreign tax credit for the amount paid to the foreign government, effectively paying just one tax.
However, in a tax-deferred account, the foreign government will still claim its share, but you won’t receive any IRS tax credit. Consequently, the tax paid to the foreign state is irretrievably lost.
Each nation has its unique withholding percentages and guidelines. For example, Canada generally withholds 25% of your dividend, unless it’s in a tax-deferred account, an exception among countries. Places like Australia and New Zealand impose hefty withholdings of 30%, while Chile, the Czech Republic, and Switzerland top the list at 35%. Meanwhile, in China, the rate is 10%. The UK refrains from withholding unless the investment is in a real estate investment trust, where it’s 20%.
4. Placing Bonds and Fixed Income Investments in Tax-Deferred Accounts
If you possess bonds, CDs, or other taxable fixed-income instruments, housing them in tax-deferred accounts is advisable. Interest income incurs your regular income tax rate, generally higher than dividend tax rates.
Most Americans face a 15% tax on qualified dividends, with the highest tax brackets paying up to 23.8%.
In 2025, this 15% applies to single individuals earning between $48,351 and $533,400 and married couples with incomes between $96,701 and $600,050.
For instance, if your household income is $200,000, your dividend tax rate will be 15%, whereas your income tax rate is 22%.
If you earn $10,000 in dividends within a taxable account, your tax liability stands at $1,500. In comparison, $10,000 in bond interest would cost $2,200 in taxes. Thus, if you have to choose which investment to place in a tax-deferred account, opting for bonds could save you $700 in taxes.
Hold Onto More of Your Earnings
Ultimately, your money is better in your pocket than in Uncle Sam’s. I urge you to use these four strategies to maximize what you keep, rather than letting the government spend it on questionable projects like determining if lonely rats are more inclined towards cocaine—a real study, believe it or not.
Avoid letting your money fund such endeavors. Focus on making your investments as tax-efficient as possible.
