Conditions for Using Tax-Deferred Accounts
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Conditions for Using Tax-Deferred Accounts
Studies on taxable accounts vs. tax-deferred accounts are merely that—studies. They don’t always reflect your real-world situation. For example, these studies don’t address what an investor who is 100% in stocks ought to do.
Things To Know
- Studies on taxable accounts vs. tax-deferred accounts don’t always reflect your real-world situation.
A few rules of thumb for all-stock investors:
- Place individual stock holdings that you plan to hold for a long time in your taxable account; hold shorter-term stock investments and stock mutual funds in your tax-deferred account.
- Place stock funds with very lower turnover ratios—say, below 20% per year—in your taxable account and those with higher turnover ratios in your tax-deferred account.
- Place large-company index funds in your taxable account—they tend to be tax friendly.
Moreover, the studies don’t touch on the quality of the fund choices available within the tax-deferred plan. Say your retirement plan offers only two choices: a highly rated large-cap index fund and a poorly rated high-turnover small-cap fund. If you listened to the studies, you’d probably choose the small-cap fund for tax reasons—even though it’s not the better investment overall. Don’t let tax considerations overshadow the quality of an investment.
