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Author: AcmeFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6743  
Subject: Allocation Accross Accounts Date: 4/25/2002 5:40 PM
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(In light of starting a new thread, here we go...)

I have a question regarding asset allocation accross mutiple accounts, each with a different tax status.

As an example, assume someone wanted an allocation of 80% Total Stock Market Index and 20% Total Bond Market Index. If all of the accounts had the same tax status -- i.e. all are taxable brokerage accounts -- there would be no issue...buy the funds in the appropriate ratio and balance at regular intervals.

However, what if said person had the following funds for allocating (assume this is all long-term holding for retirement):

$20,000 in a Roth IRA;
$30,000 in a taxable brokerage account
$50,000 in a 401(k)

Since each has differing tax rules -- the Roth is tax-free; the taxable account will pay regular income taxes on dividends as well as capital gains taxes on some funds and most sales; the 401(k) is tax-deferred, but you will pay regular income taxes when money is withdrawn.

Given these different tax rules, it seems like the "optimal" allocation might not be to simply have a total of $20,000 in bonds and $80,000 in stocks. After all, $20,000 in the Roth may be worth the same as $30,000 -- or more -- in the 401(k).

So...what say you? Should people worry about the differing tax-status of the accounts? Should this consideration be used to potentially shift the allocation on a pre-tax basis to create the desired after-tax allocation?

Thanks for any thoughts you may have.

ACME

PS:
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