Where to invest in what

Here’s an under-appreciated way to save money: Park certain investments in certain kinds of accounts in order to minimize taxes.

For example, if you buy and sell stocks relatively frequently, do so in a taxdeferred or tax-free retirement account — such as an IRA — to avoid getting whacked with the short-term capital gains tax rate. That’s your ordinary income tax rate, which could be 24%, 35% or more. (Studies suggest that it’s best not to trade frequently though.) Gains on stocks you’ve held for more than a year are taxed at the long-term capital gains rate, which is 15% for most of us.

If you’re investing in some stocks you think have a good chance of soaring over time, consider parking them in a Roth IRA, because withdrawals from a Roth account in retirement can be made tax-free.

Tax-deferred or tax-free accounts such as IRAS and 401(k)s are also good for taxable bonds and bond funds. That’s because their interest payments to you are taxed at your ordinary income tax rate, and you can delay or avoid paying taxes on that income if it arrives in such accounts. (Delayed taxes can be lower taxes, too, as many people are in lower tax brackets once retired.)

So what might you hold in your regular, taxable brokerage accounts? Well, municipal bonds are good candidates, as they generally pay out tax-free interest. You might also use the accounts to invest in individual stocks that you plan to hang on to for a long time, as any gains they generate will likely face that 15% long-term capital gains tax rate.

When it comes to managed stock mutual funds, which distribute taxable dividends and capital gains each year, you might favor funds that are particularly tax-efficient. You can look up a fund’s tax profile at Morningstar. com (click on the “Price” tab once you’re at a fund’s page).

By investing a little more thoughtfully within each of your financial accounts, you may be able to shrink your tax bill.