Tax Considerations
Retirement accounts can grow tax deferred until withdrawal. ?Consequently, this is a good place for frequently traded securities, or to rebalance your assets without tax consequences. ?This also means that you should defer withdrawing these funds until required allowing you to earn as much from the deferral of taxes as possible. ?The price that you pay for this benefit is that all preferentially taxed items lose their preferential tax characteristics in a retirement plan.
For example, long term capital gains and Qualified Dividends are both taxed at maximum rates of 15% (currently through 2010). ?When these gains occur in an IRA, they are not taxed in the year that they occur or are received like taxable accounts. ?However, years later when they are withdrawn they are treated as ordinary income and maybe taxed at a maximum federal rate of 35%. ?The other price that you pay for the benefit of tax deferral of holding investments in your IRA is that your losses are not deductible in the year of the loss and cannot be used to offset gains that you have in your taxable accounts. ?Instead they just reduce the amount available for withdrawal and hence the amount taxed.
Although it is difficult for even the most seasoned financial planner to determine the proper allocation between a client's taxable accounts and IRA accounts, one approach might look like the chart on the next page.
Excerpt from The Complete Guide to Estate and Financial Planning in Turbulent Times (Collaborative Press, 2011) - Walt Dallas, Contributing Author
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