My wife and are are getting a late but not too late start on retirement savings (ages 34 and 37). Fortunately we have access to tax advantaged accounts through work -- I have a 457 plan, and she can contribute to a 401(k). We'll also likely be able to put part of her bonus money into a Vanguard index fund, probably Total Stock Market from what I've read on this board. I'd say we'll be able to average about $15,000 in the 457/401(k) each year, and $15,000 in the Vanguard after tax account.

My question is this -- what types of investments should we be looking for in the tax advantaged accounts? I've read on this board that these accounts are good places for the bond and real estate portions of a portfolio for tax reasons, but in lean bonus years, I might be concerned that we're not investing enough in stocks. I want to make sure that we're diversified but would like to pick a good mix for the 457 and 401(k) plans up front and not have to continually monitor them.

Any help is greatly appreciated!

If your plan calls for equities, there is no reason why you shouldn't hold them in your 457 or 401(k).

It's when you have both taxable accounts and tax-favored accounts and your investment plan calls for some tax-inefficient investments like bond or REIT exposure that it is recommended that the tax inefficient investments be put in the tax-favored accounts instead of taxable accounts, but there isn't any reason to also hold stocks in the tax-favored accounts if there is room in them. (Well, one exception: I wouldn't put a tax-efficient stock fund in a non-deductible Traditional IRA, but that is the only exception.)

So, don't worry about stocks, even tax-efficient stock index funds, inside the 401(k) or 457--there is absolutely nothing wrong with that.

Mark - Thanks for the quick reply, this is very helpful.

The problem with doing what Mark recommends is that when you rebalance you may have to rebalance outside the tax advantaged account.

Diversification inside the tax advantaged account allows you to rebalance and minimize taxable events.

Buz

Hey buz,

Is that really a huge deal for tax efficient stock funds if you hold on to them for 366 days? Don't you only get hit the 15% LTCG as long as you rebalance only on the 366th day for those funds outside of tax favored accounts?

tia.

Jesse

Good point- by rebalancing inside the tax-advantaged account you potentially have zero tax liability-that's my point.

Each person case is different. Some investors-need/want income for current expenses. Some may have higher amounts in taxable accounts.

When possible it is better to keep a higher percentage of assets which throw off current income in tax-advantaged accounts.

Buz