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What investments are best in IRAs and 401(k)s?

Your taxable bonds and taxable bond funds. Outside a retirement account, they'd be taxed much harder than your stock funds: You get taxed on bond interest as ordinary income - the federal rate can be as high as 35% - versus a capital gains rate of 15% on stocks you've held more than a year.

It's especially important to shelter your inflation-adjusted bond funds, or TIPS funds, from the tax man. The principal value of these bonds rises to keep pace with inflation. Although you don't get the full benefit of these inflation adjustments until the bond matures or is sold, the IRS regards them as regular interest income, and taxes you each year (unless your fund is protected in a tax-sheltered account). Few 401(k)s offer TIPS funds, so your IRA is probably the best place for them.

Also, if you plan to trade stocks actively, you can rack up large short-term gains, which are taxed more highly than long-term gains. So put such stocks into your tax-sheltered accounts.

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