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The Old and New Approaches to Tax-Deferred Accounts

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The Old and New Approaches to Tax-Deferred Accounts

The traditional approach says to hold bonds in a tax-deferred account and stocks in a taxable account. The rationale is that you’re better off deferring taxes on securities, such as bonds, that generate a lot of taxable income.

Things To Know

  • If you’re investing long enough, the higher total returns of stocks over time can generate a greater tax burden than the income of bonds over the same time.

Science now says the opposite

Newer research is drawing somewhat different conclusions. It says that, 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.

Why? Because if you’re investing long enough, the higher total returns of stocks over time can generate a greater tax burden than the income of bonds over the same time.