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Best Funds for Retirement Accounts

Which Mutual Fund Types to Use in IRAs, 401(k)s and other Tax-Deferred Accounts

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Which mutual funds are best for retirement accounts, such as IRAs and 401(k)s? Do some fund types have advantages over others? There is such a thing as asset location, which is the idea that some accounts are better locations than others for certain mutual fund types.

Remember that earnings on investments held in retirement accounts, sometimes referred to as tax-deferred accounts, are not taxed until withdrawal; the tax is "deferred," meaning you pay it later rather than now. Therefore you get to keep your earnings, dividends, and interest and earn interest on top that interest, and so on. This allows for faster growth, thanks to the power of compounding interest.

To make your money work as hard as possible, be sure to locate the funds that are taxed the highest and the funds that produce the most dividends and interest in your retirement accounts. Therefore you want to keep dividend mutual funds, your bond funds and your aggressive growth funds in your IRA, Roth IRA, and/or 401(k). You can locate your index funds in your taxable accounts.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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