Portfolios 205: The Best Investments for Tax-Deferred Accounts

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Where would be a wise place to put large-company index funds?

A taxable account

A tax-deferred account

Neither of the above

A taxable account. Large-company index funds tend to be pretty tax-efficient anyway.

David has 10 years until retirement. He's in the 28% tax bracket now and expects to be in the 31% tax bracket once he retires. What should he do?

Place stocks in his tax-deferred accounts and bonds in his taxable account

Place bonds in his tax-deferred accounts and stocks in his taxable account

Place a mix of stocks and bonds in each account

Place bonds in his tax-deferred accounts and stocks in his taxable account. Because David is less than 15 years away from retiring and he expects to be in a higher tax bracket upon retirement, he should hold stocks in his taxable account and bonds in his tax-deferred accounts.

Holding your stocks in a Roth IRA can provide you with tax-free withdrawals.

True

False

True. The key word here is 'can.' As long as you meet the requirements, you can take your withdrawals tax-free.

Mike only owns stocks and stock funds--no bonds. Taxwise, what should he do?

Place individual stock holdings that he plans to hold for a long time in his taxable account; place shorter-term stock investments and stock mutual funds in his tax-deferred account

Place stock funds with very lower turnover ratios--say, below 20% per year--in his tax-deferred account and those with higher turnover ratios in his taxable account

Place large-company index funds in his tax-deferred account

Place individual stock holdings that he plans to hold for a long time in his taxable account; place shorter-term stock investments and stock mutual funds in his tax-deferred account. He should also place stock funds with very lower turnover ratios in his taxable account and those with higher turnover ratios in his tax-deferred account. Large-company index funds can go into his taxable account, because they tend to be tax-friendly.

Which statement is correct?

You should always hold bonds in a tax-deferred account and stocks in a taxable account.

You should always hold stocks in a tax-deferred account and bonds in a taxable account.

In many cases, you should own stocks in tax-deferred accounts and bonds in taxable accounts, especially if you're investing for 15 years or longer.

In many cases, you should own stocks in tax-deferred accounts and bonds in taxable accounts, especially if you're investing for 15 years or longer. If you're investing long enough, the higher total returns of stocks over time generate a greater tax burden than the income of bonds.