Saving for Retirement

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Location, location, location

March 27, 2015

Nearly four out of every ten U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a 2013 study by the Investment Company Institute. Because of the significant role they play in retirement savings, researchers from Vanguard's Investment Strategy Group set out to understand Vanguard investors' behavior when it came to IRAs. Are they saving effectively? Investing prudently for their futures?

Our researchers are sharing their findings in a series called IRA Insights. The latest installment appears below, or you can download a copy.PDF

IRA Insights: Location, location, location

Most investors should try to put their bonds in tax-advantaged accounts

To maximize IRAs, investors should consider "asset location." This means holding tax-inefficient investments in IRAs, while keeping tax-efficient investments in taxable accounts.

Bonds (and balanced funds) are generally better held in IRAs, because their return is almost entirely income. Also, investors are generally wise to own taxable bonds in a tax-advantaged account before owning tax-free bonds in a taxable account, to capture the extra return afforded by the spread between taxable and municipal bonds.

Over half of investors with a choice own bonds in taxable accounts

Active equity funds are also a good choice to include in IRAs

Many active equity funds can be less tax-efficient, because their higher turnover can lead to substantial capital gains distributions on a frequent basis.

Index funds tend to be more tax-efficient and are a good choice for taxable accounts. Individual stocks can be another tax-savvy option for investors who wish to own them long-term.

A third of investors with a choice put active equity funds in taxable accounts

Some IRA investors may have opportunities for tax savings

More than 70% of Vanguard investors with both IRAs and taxable accounts have located their investments tax-efficiently. And some of the remaining investors have good reasons not to follow these asset-location guidelines. For example, some investments have a low cost basis that would create a taxable gain when sold.

However, many investors have opportunities for better asset location. These investors may be paying more in taxes than they need to.

Could you make better use of your tax-advantaged accounts?


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
  • Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • We recommend that you consult a tax or financial advisor about your individual situation.
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