You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment?

A) Stock and bond investments should be equally invested in both tax-sheltered and non-sheltered accounts.
B) You should place all the stocks in tax-sheltered accounts and all the bonds in non-sheltered accounts.
C) You should place all the bonds in tax-sheltered accounts and all the stocks in non-sheltered accounts.
D) It makes no difference how you allocate your stock and bond investments among tax sheltered and non-sheltered accounts.

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Nagaharsha Vardhan · Accepted Answer

Final Answer : C, Explanation :  Since you can only tax-shelter one-half of your retirement savings, it makes sense to allocate the tax-sheltered investment to the asset class that typically generates more taxable income – bonds. Therefore, all the bonds should be placed in tax-sheltered accounts and all the stocks in non-sheltered accounts. This will help to reduce the overall tax burden on your retirement savings.

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