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Rule of Thumb
Old 12-13-2006, 01:13 PM   #1
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Rule of Thumb

Is there a rule of thumb as to what investments should be held in Qualified Plans, and which ones in Taxable Plans? I am starting to consolidate holdings, and when I allocate, I will have the choice -

specifically - where best for

index funds - any qualifiers on the type?
reit funds
cash
CD's
Savings Bonds - (these have to be in taxable I think)

Essentially I have some IRA's (both Roth and Regular), 457 Plan, and Taxable Accounts. It is my understanding that I should leave the 457 alone and not rollover as it does not require a minimum distribution.

Thanks for any help or suggestions folks can provide.
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Re: Rule of Thumb
Old 12-13-2006, 01:36 PM   #2
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Re: Rule of Thumb

The rule of thumb that I use is to put the investments that generate the greatest annual tax liability into the tax deferred accounts.

That means you want to shelter income that's not 15% income first and foremost. Generally, this includes most bond income including TIPs, income from CDs, the bulk of REIT distributions, income from commodity funds, and some foreign dividends.

After that (if you still can allocate more in your tax deferred accounts), you could start layering in funds that throw off large distributions like actively managed stock funds and most value funds. Keep in mind that although you get to defer the income, when you do make withdrawals from these accounts (except ROTH), you'll generally pay tax at your ordinary income tax rate instead of the reduced 15% rate.

So for me the split looks like this:
Tax deferred:
Total Bond Market, TIPS, REITs, Pimco commodity (PCRIX), Gold ETF, Value index fund (left over from when dividends were taxed at ord. income rate).

Taxable:
Growth index, emerging market idx, pac rim index, european idx, tax-emempt bonds, some CDs for liquiidity.

That's basically how I did and it seems to be making sense. .Maybe others can chime in with something I've missed or mischaracterized....

Jim
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Re: Rule of Thumb
Old 12-13-2006, 03:35 PM   #3
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Re: Rule of Thumb

If you intend on rebalancing you should have equities in both tax deferred and taxable accounts. Otherwise you will have to take large gains everytime you rebalance out of a hot sector. If you have a low tax rate this might not be an issue.

Side note: I would not reinvest dividends in taxable accounts as it becomes an accounting nightmare.
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Re: Rule of Thumb
Old 12-13-2006, 03:38 PM   #4
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Re: Rule of Thumb

Quote:
Originally Posted by boutros
I would not reinvest dividends in taxable accounts as it becomes an accounting nightmare.
if the fund company tracks your basis, what's the hassle?
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Re: Rule of Thumb
Old 12-13-2006, 06:09 PM   #5
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Re: Rule of Thumb

fidelity figures all reinvested dividends in all funds in your cost basis for you.
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Re: Rule of Thumb
Old 12-13-2006, 10:46 PM   #6
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Re: Rule of Thumb

Quote:
Originally Posted by mathjak107
fidelity figures all reinvested dividends in all funds in your cost basis for you.
but, it can still create some extra work. Reinvesting can create a short term gain/loss in addition to a long term gain/loss. And, it can even create a wash sale.

Why bother with re-investing the divs? I'd rather reallocate in one lump to avoid any extra steps at tax time.

-ERD50
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