IRA question

I’m in Portfolio management, and given that I’m young and don’t even have an IRA I’m a little confused on this. Please someone tell me if I’m thinking about this right. In the book (pg. 213 of Corporate Finance and Portfolio Management): Any funds withdrawn from an IRA are taxable as current income, regardless of whether growth in the IRA occurs as a result of capital gains, income, or both. For this reason, to minimize taxes advisors recommend investing in stocks in taxable accounts and bonds in tax-deferred accounts such as IRAs. When funds are withdrawn from a tax-deferred account such as a regular IRA assets are taxed (at most) at a 35 percent income tax rate – even if the source of the stock return is primarily capital gains. In a taxable account, capital gains are taxed at the maximum 15 percent capital gains rate. ------------------------------------- Well, this was somewhat alarming to me because everyone I know has mutual funds with stocks in them in their 401ks. Are 401ks different? Because if this is true I don’t see much of a reason to put stocks in your retirement accounts. Can someone tell me why someone should put stocks in their IRA’s? Thanks!

401K’s are not very different. Put stocks in your Roth IRA and everything is fine.

But the IRA as referenced in the book says that all your gains will be taxed as income tax. It would be less taxing to put it in a taxable and have your gains taxed as capital gains. So I should only put bonds in the IRA. Is there something that I’m missing?

hehehehe, you said “taxing”

haha I was wondering if someone was going to catch that.

I really don’t feel like answering this - it’s simplistic advice and it depends on lots of different stuff. Opposed to this view are: a) Need for income says bonds in taxable account b) Need for rebalancing stocks more often than bonds says stocks in IRA c) Roth IRA better matches tax law to investment time frame d) Short term investments in long-term account and vice versa is a risk mismatch e) Much easier to liquidate a cash account than an IRA account so short-term money should be held in cash account. Bonds are better short-term moneyt than stocks. f) You can trade in an IRA without worrying about record keeping, wash sales, tax effects, etc and trading stocks is more fun than unleveraged bond trading. g) Your tax bracket in retirement is unlikely to be at the 35% marginal rate (but we can hope). h) Nobody should buy stocks anyway. Have you seen these markets?