Stock vs bond investments in 401k vs taxable account

I've read the articles that make the case that it is preferable to put higher dividend/distribution investments in tax-deferred (401k, Roth) accounts. But according to my calculations, that only makes sense if the 2 investments have the same total return.

Let me propose this scenario where I am making investments in:

1) stock fund with 10% return, 100% capital gain, 0% distributions 2) bond fund with 5% return, 0% capital gain, 100% distributions I will invest one in a regular taxable account ($1000 after tax) and one in my 401k ($1333 pretax). I need to decide which one. The tax rate is 25% for eternity.

For the stock fund, the difference between 401k vs taxable, is 33% advantage to the 401k (no matter how many years). For the bond fund, the advantage to the 401k is 52% after 20 years, 80% after 40 years.

Initially, it seems that putting the bond fund in the 401k and the stock fund in the taxable account is the best solution. However, if you take into account the *absolute* difference, it appears that after

20 years and after tax, you would have an extra $1430 for the stock fund in 401k vs taxable. For the bond fund after 20 years, you would have an extra $564 in 401k vs taxable.

Therefore, taking into consideration the total return as well as distributions, it is better to invest the stock fund in the 401k and the bond fund in the taxable account. I would love to hear feedback on this.

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bucky3
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