For the best after-tax returns, investments with the biggest tax consequences should be sheltered in tax-deferred accounts such as a 401(k) or IRA. Among these are corporate bonds, bond mutual funds, and REITs, whose income is subject to income tax rates of up to 37%. Other good candidates for tax-deferred accounts are investments that generate short-term capital gains, such as actively traded stocks. Gains are considered short term if they’re realized within 12 months, and are taxed up to the 37% income tax rate.
Meanwhile, taxable accounts should hold the most tax-efficient investments, such as tax-exempt municipal bonds and separately managed investment accounts in which a manager actively harvests losses to offset gains and minimize taxes. Other investments in this camp include stocks held for the long term and mutual funds with low turnover rates, such as stock index funds.
The Best Way to Bankroll Your Kids—Without Ruining Your Retirement – Barron’s
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