Many investors hold stocks and bonds; they also may invest in an IRA and in a taxable account. If you’re in this situation, here are the reasons why your stocks and stock funds belong in the taxable account:
1. Stocks receive more favorable tax treatment than taxable bonds. Any profits from stocks may be taxed at capital gains rates while bond interest is taxed at higher ordinary income rates.
2. Stocks are more volatile than bonds. Therefore, you are more likely to get the tax benefit of capital losses from stocks, but only if the stocks are held in a taxable account.
3. With stocks, there is more potential for a step-up in basis for your heirs. After inheriting appreciated stocks, your heirs can sell the shares without paying tax on prior appreciation. This opportunity is lost if stocks are held in an IRA.
4. Appreciated shares can be donated to charity, avoiding any tax, if they are held in a taxable account. Such gifts are more tax-efficient than contributing cash. If you donate appreciated stocks held in an IRA, you’ll owe income tax on the IRA withdrawal.
5. Any foreign tax credits generated by investments provide no tax benefits if the assets are held in an IRA. You are more likely to pay foreign tax on stocks than bonds; outside of your IRA, foreign tax paid may generate a credit on your federal income tax return.
