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Why this is correct (Q16 — bond funds/REITs in tax-advantaged accounts): The recommendation to hold bond funds, REITs, and other income-generating or tax-inefficient assets inside tax-advantaged accounts is based on how different investments generate taxable events. Bond interest and many REIT distributions are taxed at ordinary income rates in taxable accounts each year as they are paid; that recurring tax drag reduces after-tax returns. Tax-advantaged retirement accounts shelter those annual distributions from immediate tax, allowing full pre-tax or tax-free compounding depending on account type. Conversely, tax-efficient assets like broad equity index ETFs often generate little current taxable income (capital gains are realized infrequently), making them more suitable for taxable brokerage accounts. This “asset location” principle is a straightforward, low-complexity way to reduce lifetime taxes without chasing specific tax strategies.

Practical takeaway & implementation: When building portfolios across taxable and tax-advantaged accounts, prioritize placing high-yield, high-turnover, or interest-bearing investments in retirement accounts to avoid annual tax drag. Keep tax-efficient equity funds or strategies in taxable accounts to take advantage of preferential long-term capital gains treatment and potential tax-loss harvesting. Rebalance with attention to tax consequences—favor rebalancing tax-advantaged accounts for the least friction. Also check plan investment menus and fees; if your 401(k) lacks low-cost bond or REIT exposures, consider compensating with IRA or taxable allocations while keeping the general asset-location principle in mind.

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By Quiz Coins

Filing taxes early helps catch errors, avoid last-minute stress, and get refunds sooner when you’re owed one.

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