Hold interest-bearing bonds in the IRA and stocks in a taxable account.

As retirement approaches, an investment portfolio is likely to hold both appreciating stocks and interest-bearing bonds. Which of these is best to hold in an IRA? Bonds that pay taxable interest benefit right away from the tax deferral provided by an IRA. Their interest compounds on a pre-tax basis. In contrast, capital gains on stocks that would be tax-favored if earned outside an IRA are taxed at ordinary rates when distributed from an IRA. And losses on stocks aren’t deductible if they are held in an IRA. These factors favor holding bonds in the IRA and stocks in a taxable account. However, stocks provide a higher average return than bonds. So if a person will own stocks (or stock funds) for many years, the final gain on them may be much more than your total gain on bonds.