A client retires at 62 with a $1.4M traditional 401(k), a $300K Roth IRA, and a taxable brokerage account holding low-basis employer stock. The wrong sequence of withdrawals can hand 30% of that nest egg to the IRS over the next decade. This lesson is the architecture you need to keep that money where it belongs.
Tax efficiency starts with how long the client held the asset. Hold a security more than one year and the gain is long-term, taxed at 0%, 15%, or 20% depending on taxable income. Sell inside a year and the gain is short-term, taxed at the client's ordinary rate, up to 37% federal.
Qualified dividends (paid by U.S. corporations and most qualifying foreign issuers, with a 60-day holding window around the ex-dividend date) get the same preferential 0/15/20 schedule. Ordinary (nonqualified) dividends, including most real estate investment trust (REIT) distributions and money-market dividends, are taxed at ordinary rates.
HIGH-FREQUENCY: A client harvests a $10,000 short-term gain in December to "lock it in." Bad move.
Common mistakes
- Confusing qualified vs. ordinary dividends. REIT distributions, money-market dividends, and most foreign dividends are ordinary and taxed up to 37%. Only U.S. corporate dividends meeting the 60-day holding window get the 0/15/20 rate. Candidates assume "dividend = qualified" and pick the wrong tax answer.
- Forgetting the Roth IRA owner has no RMD. Traditional IRAs and 401(k)s require distributions starting at 73. Roth IRAs require none during the original owner's life. Beneficiaries inheriting any IRA generally face the 10-year rule, with limited exceptions.
- Treating an IRA as ERISA-covered. ERISA covers private-sector qualified plans: 401(k), 403(b), defined benefit. IRAs, governmental plans, and church plans are not under ERISA's fiduciary regime. The QDRO mechanism applies only to ERISA plans; an IRA splits in divorce via a "transfer incident to divorce."
Bottom line
- Long-term capital gains and qualified dividends are taxed at 0%, 15%, or 20%; short-term gains and ordinary dividends are taxed at ordinary rates up to 37%
- AMT, NIIT, and IRMAA are surcharges targeting high-income clients; NIIT adds 3.8% on net investment income above $200K (single) / $250K (joint)
- Traditional IRA/401(k) = pretax in, taxed out, RMDs at 73; Roth = after-tax in, tax-free out, no RMDs for owner; 2026 IRA limit $7,500 ($8,600 age 50+), 401(k) elective $24,500 ($32,500 age 50+); under the SECURE Act a non-EDB beneficiary...
- ERISA covers private-sector qualified plans; fiduciaries owe sole-interest, prudent-expert, diversify, and follow-the-document duties; QDIA gives a safe harbor for default investments under §404(c)
Exam shortcut
"Wrapper before asset" for tax planning. When a question asks where to hold a bond fund versus a growth stock fund, the wrapper drives the answer. Tax-inefficient income (REITs, taxable bonds) goes in tax-deferred accounts. Tax-efficient growth (index ETFs, low-turnover stocks) goes in taxable accounts to capture stepped-up basis. Roth holds the highest-expected-return assets to maximize tax-free compounding.
The full lesson (about 4,646 words, 31 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C10
- C11
- C12
- C13
- C14
- C15
- C16
- C17
- C18
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