Which investments are better for taxable accounts?

Stocks and stock funds - because they generate lower taxes than taxable bonds and bond funds do. Municipal bonds, which generate tax-free income, are also better off in regular investment accounts.

But even within the stock portion of your portfolio, there are differences that may affect your strategy of what to put where.

The most tax-efficient - that is, the lowest-taxed - stock investments are individual stocks that you buy and hold, rather than actively trade. That's because you get taxed on the dividends (if any) every year, but you don't get taxed on the capital gains until you sell.

The second most tax-efficient kind of stock investment is a stock index fund or stock index ETF. That's because index funds trade stocks relatively infrequently, racking up fewer "realized gains" than actively managed funds do.

The least tax-efficient kind of stock investment is an actively managed stock fund.

So let's say that you've already put all your bonds and bond funds in your 401(k) and IRA, and still have room to put some stocks or stock funds there. If you have any actively managed stock funds, move them there first. Next, move your index funds or ETFs. Lastly, move your individual stocks that you plan to hold for a long time. To top of page

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