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Friday, January 15, 2010

How to Invest Retirement Assets

We are often asked how to distribute assets between accounts that usually include
  • Taxable accounts at brokerages
  • 401K and SEP plans at work
  • ROTH IRAs
  • Regular IRAs
There is no "right answer" but some things to consider are:

Taxes on dividends and long-term capital gains are lower than regular income so you should have equities you expect to hold for a long time in taxable accounts.

The tax rates are highest for short term trading and regular income such as distributions from CDs, Money Market Funds and corporate bonds. These are good items for deferred accounts and ROTH IRAs.

Some securities, like US Treasury Bonds, Notes and Bills, may be exempt from State Income Tax (the rules are so complex with AMT I hate to say "always" so check your tax accountant to see how this applies for you.) These may be better in your taxable account than your IRAs.

Index funds, which are all we recommend in our Retirement Advisor model portfolios, are very tax efficient so they are good for taxable accounts if you don't trade in and out often. It often makes sense to have the model portfolio equity funds duplicated in your retirement accounts to help you rebalance without paying short term capital gains, but this adds complexity some may wish to avoid.

Managed mutual funds are often not very tax efficient so they are good for tax deferred accounts. For example, I have a few managed mutual funds in my personal "IRA Rollover" account I have kept from the 1990s when I worked at HP. I don't recommend them in either of my newsletters, but I like them for diversification and kept them as part of my "core and explore" approach to investing. They have done very well through the last two bear market cycles so I will keep them as long as they continue to beat or match the markets. If they start only matching the markets, then I will simplify my portfolio and add the money to the index funds we recommend in the Retirement Advisor.

Happy New Year!

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