Here at The Oxford Club, we firmly believe that successful investing isn’t about what you make, but what you keep.
Renowned U.S. federal judge Learned Hand is famous for saying, “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.”
But I believe another quote of his is just as important…
“There are two systems of taxation in our country: one for the informed and one for the uninformed.”
That’s why we want to make sure you’re as informed as possible: so you can keep every dollar you’re entitled to by maximizing your portfolio for tax-efficiency.
Below are the steps you can take to ensure you’re not paying more than you have to.
As I always strongly recommend, talk to a tax professional if you have any questions.
1. Put Domestic Dividend Payers in Tax-Deferred Accounts
If you are regularly collecting ordinary or qualified dividends from certain investments, put those investments in tax-deferred accounts if possible.
If you have other stocks that don’t pay dividends, you’re better off keeping those in taxable accounts.
The exception to this rule is if you are an active trader and have a lot of capital gains each year.
You’re better off having short-term positions in tax-deferred accounts since short-term gains are taxed at your ordinary income tax rate, which is higher than the 15% to 23.8% rate on your dividends. But for most investors, it’s better to preserve space in tax-deferred accounts for dividend payers.
And remember, if you’re reinvesting the dividends from stocks held in a taxable account, you’ll still have to pay taxes on the dividends even though you didn’t collect any cash during the year. So make sure you have the funds to pay the taxes on the dividends.
That brings up another reason to use a tax-deferred account for your dividend stocks: When you reinvest the dividends, you don’t pay taxes on them until they’re withdrawn, allowing you to compound that money for years without paying taxes on it.
2. MLPs Go in Taxable Accounts
It’s important that you keep master limited partnerships, or MLPs, in taxable accounts.
The income from MLPs is mostly considered “return of capital,” which is not taxable and lowers your cost basis.
Here’s how that works…
If you buy a stock at $20 and receive a $1 distribution that is all return of capital (MLPs pay distributions, not dividends), you will not pay any tax on the $1 that you earned. Instead, your cost basis will become $19. If you later sell the stock at $25, you will pay taxes on $6 in capital gains rather than $5.
There is generally no need to keep MLPs in a tax-deferred account (unless, as I explained above, you’re actively trading them and consistently capturing capital gains). If you keep them in a tax-deferred account, they’re taking up valuable space that would be more useful for a less tax-efficient investment.
Furthermore, the distributions paid by MLPs sometimes contain unrelated business taxable income, or UBTI. If you earn $1,000 or more in UBTI in a tax-deferred account, you will be on the hook for taxes and possibly fees or penalties.
3. Foreign Stocks That Withhold Taxes Should Be in Taxable Accounts
When you own stock of a U.S.-based company, you receive your dividend in total and then figure out later how much you owe the IRS. Foreign stocks are different. Many foreign governments dip their sticky hands into your dividends before you get them.
For example, if you own a German stock, the German government will take 26.375% of your dividend before it hits your account.
If you hold the stock in a taxable account, you will also owe U.S. taxes on the dividend, but the IRS will issue you a foreign tax credit equal to the foreign tax you paid, so you will essentially pay only one tax.
Here’s where it gets tricky, though: If you own the stock in a tax-deferred account, the foreign government will still take its share, but the IRS will not allow you a tax credit. So the money you paid to the foreign country is gone forever.
Each country has its own withholding rate and rules. For example, Canada is unique in that it will take 25% of your dividend unless the dividend is in a tax-deferred account. Most other countries will still collect from the tax-deferred holding.
Australia and New Zealand have among the highest withholding rates, at 30%. Chile, the Czech Republic, and Switzerland have the highest, at 35%. In China, the rate is 10%. The U.K. doesn’t withhold any tax unless the investment is a real estate investment trust, in which case it’s 20%.
4. Hold Bonds and Fixed Income in Tax-Deferred Accounts
If you own bonds, CDs, or other taxable fixed income investments, they should be held in a tax-deferred account if possible. Interest income is taxed at your ordinary income tax rate, which is typically higher than the rate for dividends.
Qualified dividends are taxed at 15% for most Americans. Those in the highest tax brackets will pay as much as 23.8%.
In 2025, the 15% rate is applied to single earners whose income is between $48,351 and $533,400 and married couples making between $96,701 and $600,050.
Let’s say you and your spouse bring in $200,000 in income. Your dividend tax rate would be 15%, while your income tax rate would be 22%.
If you earned $10,000 in dividends in your taxable account, you’d owe $1,500. If you earned $10,000 in bond interest, you’d owe $2,200. So if you could only hold one of those investments in a tax-deferred account, you’d be better off holding the bonds in the tax-deferred account so you could save $700 in taxes.
Keep More of What’s Yours
Your dollars are better off in your hands than Uncle Sam’s. I encourage you to use these four strategies to maximize the amount that you get to keep, rather than shipping it off to the government so they can spend it on a study to determine whether lonely rats seek cocaine more than happy rats (yes, that really happened).
Don’t let your hard-earned money pay for rat cocaine. Make your investments tax-efficient.