Taxable or Tax-Deferred Account: How to Pick

Use our guide to decide which assets belong in a taxable account and which go into a tax-advantaged account.

person playing connect four with red chips and gold dollar sign chips
(Image credit: Illustration by Daniel Diosado)

Which investments you hold matters (and in what proportions), but so, too, does where you hold them, whether it's in a tax-advantaged account or a taxable one. A recent lawsuit against Vanguard Group reveals how important such a decision can be.

Earlier this year, three investors sued Vanguard for negligence and breach of fiduciary duty after the investment company's target-date funds made a substantial capital gains distribution in late 2021, generating an unexpected tax bill for the plaintiffs (and other Vanguard investors). (Mutual funds are required to pass on any realized net gains to fund shareholders at least once a year.) But if the investors had held those mutual fund shares in tax-sheltered accounts instead of in taxable ones, the unwelcome tax bill could have been avoided.

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Nellie S. Huang
Senior Associate Editor, Kiplinger's Personal Finance

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.