Know Where To Hold ‘Em

Changes in capital gains taxes can work to your benefit. Here's how.

provide an example. Consider two investors, Joe and Joan, who both:
Have $20,000 to invest-$10,000 in an IRA and $10,000 in a taxable account.
Divide their investment money 50-50 between stocks and bonds.
Pay ordinary income taxes at 40% (including federal, state and local taxes).
Invest their bond money in Treasuries yielding 6%.
Invest their stock money in individual issues that yield 2% each year and appreciate a further 8% per year.
Hold on to their stocks throughout the 20-year period.

Joe decides to hold his stocks inside his IRA, while keeping his bonds outside. Joan goes the opposite way: bonds in, stocks out.

According to the Boston accounting firm Brown & Brown, at the end of 20 years, the results will look like this:
“Logic would dictate,” says Carolyn Stall, a CPA and certified financial planner with Brown & Brown, L.L.P., “that those investments that produce current income should be held in a tax-deferred account and those that can produce deferred income, such as growth stocks, should be held in taxable accounts.”

Joe (Stocks In,
Bonds Out)

Joan (Bonds In,
Stocks Out)

IRA $672,750 $320,714
Taxable acct. 202,859 591,678
Total 875,609 912,392
After retirement 673,784 816,178
(30% tax rate)
Pages: 1 2