Do Growth Stocks belong in a Roth IRA

Ask SmallIvy

Dear SmallIvy,

I’m in my early thirties and just started a Roth IRA.  I was wondering if I should invest in growth stocks in the IRA or keep them in my regular account.
Thanks a bunch,
Scott P.
In general you should fully fund the IRA to get as much protection from taxes as you can.  If you invest in both growth stocks and stocks that pay large dividends, put the stocks that pay the large dividends primarily in the IRA and then fill in the rest with growth stocks.  At your age you may want to primarily invest in growth stocks anyway.
The reason is that if you are investing the right way, buying long-term growth stocks, you should not expect to be selling them very often.  You therefore should not realize a gain that often on the growth stocks.  When you do you can also offset the gains with losses on other investments and capital gains tend to be treated more favorably than dividends when it comes to taxes (although laws change all the time).  Dividends, on the other hand, are paid and taxable each year.  If you can shelter the dividends from taxes and reinvest through a DRIP program this will allow for compounding and better returns than if you needed to pay taxes on them each year.

Comments appreciated! What are your thoughts? Questions?

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