Investments for Tax-Deferred Account

The article “Which investments are best for tax-deferred account? ” by Mary Beth Franklin discusses popular investment opportunity and analyzes which would be the most suited for tax-deferred account. The author pays attention to tax-free bonds, taxable bonds, bond mutual funds, dividend-producing stocks, income mutual funds, growth stocks, higher turnover mutual funds, and interest rates.

Franklin argues that “the key advantage of stashing money in a tax-deferred retirement account isn’t just that you’ll pay less to the government this year, but that your investments will compound faster than in a taxable account”. She means that tax-deferred accounts ensure better retirement. Among the famous types of such accounts are SEP (Simplified Employee Pension), IRA (Individual Retirement Account) and 401(k). If funds are taken after retirement, the interest income is tax-free. She doesn’t recommend investing in tax-free bonds as the earnings will be taxed as regular income in case of withdrawal.

Instead, she says that bond mutual funds and taxable bonds are good investment for tax-deferred account as income from them is subjected to state and federal states, and until retirement that are exempted these taxes. Further, income mutual funds and dividend-producing stocks also offer benefits and earnings come from dividends which should be kept in tax-deferred retirement accounts. Growth stocks are matter of controversy as some financial experts argue that “it is better to keep these stocks in taxable accounts because most of their gain is from price appreciation”.

It means that tax isn’t imposed till you decided to sell your stocks. This type can be used only if a person is going to hold stocks for a long period. Higher turnover mutual funds are also a good candidate for investing as they usually sell and buy many stocks every year. However, if they are kept in tax-deferred account, they will be taxed on the gains. Summing up, the author recommends contributing as much as it is possible for tax-deferred account to increase retirement income and to ensure descent retirement.