What Goes Where? The Art of Asset Location

I’ll confess: When it comes to matters of money and investing, there are a handful of topics that make my head hurt. One of them is “asset location”–essentially, the placement of investments in taxable or tax-sheltered accounts.

Why is asset location such a sticky wicket? For one thing, the tax treatment of investments changes frequently, so what’s an optimal asset placement today may not be a few years from now. Dividends provide a great case in point. Prior to 2003, income from stock dividends was taxed at the ordinary income tax rate, so you’d generally want to hold income-rich stocks in your tax-sheltered accounts.

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But when dividends began to be taxed at the lower, capital-gains tax rate, they were no longer verboten for taxable accounts. [Read the full article]

In the past five years, the administrations of both parties have tried to reform three big-ticket items: the tax code, health care and Social Security.

Now policymakers’ work is infinitely harder as they wake up to the realization that they must deal soon with the country’s long-term fiscal problems.

“It’s going to take bold strokes to deal with this challenge. It’s going to take big ideas, and it’s going to take political courage because it’s every hot-button issue that’s out there. It is Social Security. It is Medicare. It is revenue. All of them,” said Senate Budget Chairman Kent Conrad, D-N.D., at a hearing last week on fiscal sustainability.

The president’s yet-to-be formed bipartisan fiscal commission will be asked to propose ways to hit two key targets:

to then stabilize the nation’s total accrued debt at something far lower than 77% of GDP, which is where it would be by 2020 under President Obama’s proposed 2011 budget. [Read the full article]

There is no denying the benefits of converting money from a traditional IRA to a Roth retirement account.

Not only do the earnings in a Roth grow tax-free, but there’s no minimum distribution age attached, allowing your money to work longer and harder during retirement.

Another Roth advantage is that you can take early withdrawals penalty-free (as long as the account has been open at least five years) for any reason — so long as you limit your withdrawals to the initial principal.

Income earned from investments can also be withdrawn to cover qualified expenses, including the purchase of a first-time home, medical insurance premiums or higher education. [Read the full article]

Workplace-sponsored retirement accounts aren’t the only way to save. You can also stash money in Individual Retirement Accounts, or IRAs.

IRAs boast rich tax benefits that give savings an extra edge to compound. The tax benefits depend on the IRA you select — a traditional or Roth IRA.

Annual contributions to both accounts are the same — up to $5,000 per person, or $6,000 for individuals who are 50 or older. For the 2010 tax year, limits remain the same.

That said, some experts say the Roth IRA may be the better choice for most individuals because they offer potentially greater tax breaks and more flexibility in terms of funding and withdrawing funds.

“I do like the Roth over the traditional IRA for a number of reasons,” says Rick Meigs, president of 401khelpcenter.com. “I like the concept of having your money tax-free forever. [Read the full article]

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