6 Investment Picks for Taxable Accounts

Analysis October 28, 2026 at 02:41 AM

Even as volatility leaves financial advisors' clients wondering how to address their portfolios, it's important to remember that certain choices — such as developing a tax-efficient investing strategy — can make a big difference no matter the market environment.

1. Municipal Bonds and Municipal Bond Funds

While interest from taxable bond funds — taxed at the investor's ordinary income tax rate — can hit returns, that's not the case with municipal bonds and municipal bond funds, Benz wrote. Muni bonds and funds aren't subject to federal income tax, and clients also may be able to avoid state or local taxes on municipal bonds or bond funds tied to their state or city, she added.

A client's tax bracket may play a role in choosing the type of bonds for a taxable account, Benz noted. While municipal bonds and municipal bond funds make sense for those in higher tax brackets — 24% and higher — taxable bonds might produce a better yield for investors in lower tax brackets.

She suggested high-quality, short-term municipal bond funds for near-term goals, and longer-duration or lower-quality funds for longer-term spending needs.

Benz also cited municipal money market funds as an appealing choice for taxable accounts, saying they tend to make sense for higher-income investors who need to maintain liquid reserves on an ongoing basis. "There are broadly diversified municipal money market funds as well as ones that focus on bonds from a specific state; those might be especially attractive for high-income people who live in high-tax states like California," she told ThinkAdvisor.

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4. Stock ETFs

6. Tax-Managed Funds

These mutual funds are designed to minimize taxes by avoiding holdings that generate ordinary income and by offsetting capital gains with losses, Benz noted. While ETFs have garnered more attention lately, there remain many attractive tax-managed fund choices, she said, including a "rare multi-asset fund" at Vanguard (VTMFX) that fits well in taxable accounts.

Advisors and clients should bear in mind several mistakes to avoid when deciding what investments to place in taxable accounts.

They shouldn't assume that all ETFs and index funds are "magic tax-efficiency bullets," Benz told ThinkAdvisor. "They're not. Bond ETFs and index funds will usually be as tax-inefficient as bond mutual funds, because most of your return as a bond investor is ordinary income. Similarly, if an equity ETF or index fund tracks a high-turnover index or sees big outflows, that can lead to high taxable gains."

They also should remember the role of dividend-paying stocks. While dividend tax rates are lower than ordinary income tax rates, high-dividend stocks "force the taxpayer to pay taxes year in and year out, versus at time of sale for capital-gains-producing investments," she said.

Advisors shouldn't overlook doing multi-year tax planning, incorporating the trajectory of the client's tax bracket over time, she added.

"Finally, a key issue is assuming that you're stuck with an investment that is tax-unfriendly — say, a mutual fund with a history of making big capital gains distributions. Because you receive a step-up on those distributions, selling out of it may not cost you as much in taxes as you'd expect."

(Image: Shutterstock)

Dinah Wisenberg Brin

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