Consider the following investments for an IRA or another tax-deferred retirement plan:
- High-yield (junk) bonds. Inside a retirement plan the high yields won’t be slashed by taxes each year.
- High-yield stocks such as real estate investment trusts (REITs) and electric utilities. Again, such holdings would benefit from tax deferral.
- Stocks and stock funds you intend to trade actively as well as high-turnover mutual funds. Inside a plan, any trading gains would sheltered from current taxes.
- What securities belong in your taxable account?
- Cash reserves that you reach easily, in case of an emergency.
- Low-dividend stocks and stock funds you intend to hold for an extended time period. If a stock pays no dividend and you don’t trade it, that stock will generate no annual income tax bill. You get no benefit from holding it inside a retirement plan; you’re actually wasting the annual tax shelter.
- Foreign securities, because taxes (to foreign countries) may be withheld on dividends paid by companies outside the U.S. If the securities are held in a taxable account, you can claim an offsetting tax credit on your U.S. tax return.
