Fair point. I guess the lesson is to avoid individual stock picking! But yes, the point about the valuable and limited space of tax-advantaged accounts is appreciated. Thanks for the note.

However, the more likely scenario with stock picking is to underperform the market. In that case, you have wasted precious tax protected space on a suboptimal investment. For example, you foolishly invest a year’s worth of roth contributions ($6k) into the latest meme stock hoping to strike it big and shelter the gains from taxes. A couple years from the initial investment, you realize the error of your ways and decide to swap your holding, at a loss, for something more sensible (maybe value of that investment is now $4K). While you can swap holdings with ease in the tax protected account, you cannot make any catch up contribution to account for the $2k loss in tax protected space.

If however, you had made that same foolish investment in a taxable account, you could tax loss harvest up to $3K against that years ordinary income, carry that forward to future years to deduct from ordinary income, and/or use that to offset capital gains at any future date.

Yes, mistakes made with legacy holdings are easier to swap out in a tax protected account, but that comes at the high potential price of minimizing the total investment dollars in your tax protected account. For that reason, I would advocate that your most sensible investing should take place in tax protected accounts (especially if they are tax inefficient like total international funds, REITs, or non-municipal bond funds), and that if you choose to stock pick it should be done in taxable. If you strike it big, yes, you will have to pay taxes on the gains if you want to swap out holdings, but if you take a loss, you haven’t wasted valuable space in tax protected accounts where you cannot contribute to make up for the loss and you can tax loss harvest.

What are your thoughts?