Strategy Intermediate: The Best Investments for Tax-Deferred Accounts

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1.
Mike only owns stocks and stock funds--no bonds. Taxwise, what should he do?
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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.
2.
Where would be a wise place to put large-company index funds?
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A taxable account. Large-company index funds tend to be pretty tax-efficient anyway.
3.
Susan has 25 years until retirement. She's in the 31% tax bracket and expects to be in the 28% bracket once she retires. What should she do?
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Place stocks in her tax-deferred accounts and bonds in her taxable account. Susan is at least 15 years away from retiring and she expects to be in a lower tax bracket upon retirement. As such, she should hold stocks in her tax-deferred accounts and bonds in her taxable account.
4.
Which statement is correct?
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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.
5.
Which factor determines whether you should hold stocks or bonds in your tax-deferred accounts?
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Both time horizon and current and expected tax brackets play a part. The higher your tax bracket in retirement and the shorter your time horizon until retirement, the more you are likely to benefit from holding stocks in taxable accounts and bonds in tax-deferred accounts.