Which type of investment is generally unsuitable for tax-advantaged accounts due to its tax implications?

Investment types that generate income subject to taxation may not be suitable for tax-advantaged accounts, as these accounts are designed to defer or eliminate tax liability on certain types of income. Real Estate Investment Trusts (REITs) are a prime example of this, as they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which can lead to significant taxable income.

When held in a standard taxable account, the dividends received from REITs can be taxed at ordinary income rates, which can diminish overall investment returns. Conversely, holding REITs in tax-advantaged accounts, such as IRAs or 401(k)s, effectively absolves the investor from current taxation on these dividends, allowing for better capital growth without the immediate tax burden.

However, while REITs can be held in tax-advantaged accounts, their unique income structure makes them less beneficial in those accounts compared to investments that benefit more from tax deferral or exemption, such as growth stocks or tax-exempt bonds. Additionally, zero-coupon bonds generate no periodic interest payments, so they provide tax advantages when placed in tax accounts because their accrued interest is taxed yearly on a cash basis rather than when sold,