An Investment Puzzle: How to Put Your Assets in the Right Places

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Investment choicesObviously, what you invest in can mean the difference between getting rich and losing your shirt. But where you invest can be even more important -- especially if you end up picking winners.

Most people have several different ways to put their money to work. If you have a 401(k) or other retirement plan at work, you can have deductions pulled directly out of your paycheck and put toward your long-term savings. Opening an IRA can give you many of the same benefits with even more flexibility. For goals other than retirement, regular brokerage or mutual fund accounts let you have complete control over your money, and you can take it out or move it without any penalties.

But if you have a diversified investment portfolio with a variety of assets -- such as stocks, mutual funds, bank CDs or other fixed-income investments, and alternative investments -- you may not spend much time figuring out where each investment fits best across all the accounts you have. As a result, you could be missing out on big tax savings.

What should go where?

The right answer depends on your individual situation, but some general rules of thumb apply to many people.

1. Interest-bearing assets belong in IRAs. If you have bank CDs, bonds, or other investments that produce interest income, the best place for them is in a Traditional IRA. The reason is that these assets benefit the most from the tax savings that IRAs provide. Unlike income from stock dividends and capital gains, interest income gets taxed at your higher ordinary rate. Given how low the rates on these investments are right now anyway, the last thing you can afford is to lose a big share of that meager income to the tax man.

2. Save your best ideas for a Roth IRA. A Roth IRA is a special type of retirement account that let's you withdraw all the income it generates tax-free. Therefore, you should put the investments that have the best chance of soaring in value inside a Roth.

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High-growth stocks fit that bill. Think about some of the blockbuster gainers over the years -- stocks like priceline.com (PCLN) and Green Mountain Coffee Roasters (GMCR) that have made a bundle for their longtime shareholders. If you'd put those investments in a Roth IRA, you could've enjoyed all those profits without paying a penny in tax. That's why Roth IRAs are so valuable -- but since you can only contribute limited amounts to a Roth, you have to use your Roth money wisely.

3. Invest long-term in taxable accounts. Even though stocks give you the best chance to make significant money over the long haul, that doesn't mean that they aren't suitable for taxable accounts. Until you actually sell a stock you own, you don't pay tax on any gains. So plenty of people are still sitting on big gains from stocks like Amazon.com (AMZN) and Apple (AAPL) that they've held for years, letting their profits ride -- and they haven't had to pay a dime in tax along the way.

Moreover, as long as you hold onto investments for more than a year, any gains qualify for a tax break. Currently, the maximum tax rate for long-term capital gains is 15%, compared to up to 35% for regular income. So putting stocks and stock mutual funds or ETFs in taxable accounts can be a smart idea -- especially when you can't afford to lock up that money until you retire.

Think Smart

Figuring out what investments to buy may seem hard enough without worrying about which account to use to buy them. But in your constant fight with the IRS, it can make a huge difference -- and it's worth the effort.

For more on smart tax moves:

Motley Fool contributor Dan Caplinger learned a lot of tax lessons the hard way. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, priceline.com, Green Mountain, and Apple, as well as creating a lurking gator position in Green Mountain and a bull call spread position in Apple.


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An Investment Puzzle: How to Put Your Assets in the Right Places

By Selena Maranjian, The Motley Fool

There's a persistent assumption going around about what happens after one retires: Pundits, financial planners and even retirees often claim that your spending shrinks after you leave the 9-to-5 world.

Sure, your house may be paid off by then, and you may be able to ditch the expenses of commuting and buying clothes for work. That's not the full picture, though.

In good and not-so-good ways, many people end up spending more than they expect during their golden years.

For lots of folks, retirement means finally getting around to doing things you've been putting off for years. And those things cost money.

You may finally do some traveling in Europe, for example, or explore the U.S. in an RV. Want to get serious about your love for curling? Joining a league costs some money. Looking forward to overhauling the garden or taking up woodworking? That'll cost you, too. Even just traveling to visit and spend time with the grandkids can add up -- in travel costs, dinners to treat the family, and gifts and ice creams for the young ones.

Of course, you don't have to bear these costs. You can let the children and grandchildren come to you and can spend more time in public libraries than on golf courses. But the early years of retirement, in particular, are when folks tend to have significant energy and lots of plans.

Unfortunately, many expenses in retirement are not so discretionary.

Health care, for example, can take a huge bite out of your nest egg. Fidelity Investments recently estimated that a 65-year-old couple retiring today can expect to pay, on average, about $230,000 on health care. That's just an average, so you might spend far less -- but you could also spend much more.

Medicare probably won't provide sufficient coverage, so you might need to buy supplemental insurance, which isn't usually cheap.

Meanwhile, though a lower income level will probably mean your income taxes will decrease, you'll still be on the hook for property taxes. And those will probably keep growing over time. If your annual property tax is $3,000 and it grows at 3% each year, it will hit $5,400 in 20 years.

Your home insurance costs will rise, too, along with your car insurance premiums, the cost of heating and cooling your home, groceries, and most other items.

And finally, whereas you might expect retirement to be a time when you're no longer raising children and supporting those dependents, you might still find yourself occasionally -- or routinely -- helping your loved ones out financially.

Still, the news isn't all bad. While you might spend more than you expected to once you retire, you probably won't keep it up. As we move into and then out of our 70s, people tend to slow down and be less active. Less travel, less eating out, and fewer hobbies can mean lower spending.

Throughout most of our retirement, we'll enjoy discounts on various expenses, too, such as movie tickets, meals, and even property taxes.

What to do

Don't let your retirement plan end up designed by assumptions you never questioned. Take some time to map out what your expenses may be in retirement, and to make sure you're saving, investing, and accumulating enough to support them.

If it looks like you're not quite where you should be, you have options. You can ramp up your saving and invest your money more effectively. (Yes, you can become a millionaire on a minimum-wage salary.) You might work a few more years before retiring, too, which can do wonders for your nest egg by boosting your Social Security benefits.

Another possibility is working part-time through part of your retirement, which can add income and possibly some useful benefits as well. It also keeps many retirees happier, giving them a social setting to belong to. Downsizing to a smaller home or moving to a less costly town or region can also make a difference.

Spend some time planning now, and you'll thank yourself later.

Learn more:


AOL DailyFinance Retirement News


The Motley Fool Retirement Nook


The Social Security Administration Retirement Planner

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