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I have a high MAGI which effectively eliminates IRA or Roth IRA elegibility. (well actually I was able to contribute $1700 for 2004, but I foresee that for 2005 I will top $110k for my MAGI making me ineligible for contributions).

So question I have is that it seems that my only tax friendly retirement investing account is my 401k. For retriement saving, does it make sense to put as much as I can into the 401k and choose among the 12-13 fund choices I have there? Or to do some retirement investing in a taxable account? (eg. individual investing account at fidelity in my case).
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>> So question I have is that it seems that my only tax friendly retirement investing account is my 401k. For retriement saving, does it make sense to put as much as I can into the 401k and choose among the 12-13 fund choices I have there? Or to do some retirement investing in a taxable account? (eg. individual investing account at fidelity in my case). <<

I'd say so. Depending on how much over $110K you'll be, aggressive contributions to the 401k plan also reduce your MAGI and could make you at least partiall eligible for a Roth.

For example, if a single person had a MAGI of $114K with no 401k contributions, they would be ineligible for a Roth. But if they put the full $14,000 into a 401k plan for 2005, they would drop the MAGI to $100K, and by so doing be able to contribute $2,667 to a Roth as well.

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I have a high MAGI which effectively eliminates IRA or Roth IRA elegibility. (well actually I was able to contribute $1700 for 2004, but I foresee that for 2005 I will top $110k for my MAGI making me ineligible for contributions).

So question I have is that it seems that my only tax friendly retirement investing account is my 401k. For retriement saving, does it make sense to put as much as I can into the 401k and choose among the 12-13 fund choices I have there? Or to do some retirement investing in a taxable account? (eg. individual investing account at fidelity in my case).

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If your 401k has some decent funds that fit your asset allocation, then you would seem to be in good shape. If not, then there are always alternatives such as:

- Tax-efficient and/or Tax-managed funds in a Taxable Account. Is there a reason you have to limit yourself to Fidelity? Vanguard has a pretty decent line-up of funds that might fit your purpose:

http://flagship2.vanguard.com/VGApp/hnw/FundsByType?loc=&View=YR&Sc=0#

- Series I and EE Savings Bonds are about as safe as you can get:

https://www.treasurydirect.gov/RS/BPDLogin?application=rscreate

- Tax-exempt Bonds

- Laddered CDs, Money-Market Accounts and just good old plain cash.

- Real Estate

So there are alternatives. Just remember a couple of basics. These were put together by Taylor Larimore from the "Vanguard Diehards" Board:

4-Step Rule for Tax Efficient Fund Placement:

1. Put your most tax-inefficient funds in 401ks, 403bs, Traditional IRAs and similar retirement accounts. When full..
2. Put your next most tax-inefficient funds in your Roth(s). When your Roth(s) are full-
3. Put what's left into your taxable account.
4. Try to use only tax-efficient funds in taxable accounts.

Here is a list of securities in approximate order of their tax-efficiency. (Least tax efficient at the top.):
Hi-Yield Bonds
Taxable Bonds
TIPS
REIT Stocks
Stock trading accounts
Small-Value stocks
Small-Cap stocks
Large Value stocks
International stocks
Large Growth Stocks
Most stock index funds
Tax-Managed Funds
EE and I-Bonds
Tax-Exempt Bonds

Regards,
Bill



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What is MAGI? I know the AGI part, but not the "M"
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What is MAGI?

MAGI is Modified Adjusted Gross Income. The AGI is from the bottom of page 1 of IRS Form 1040, then the Modified part is as specified in IRS Publication 590.
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Thanks. I am always over the limit for a Roth or a deductible traditional IRA so I never had to even consider any contribution near the income limits. I just always assumed that the restriction was based on straight AGI. I guess you learn something new every day if you're not careful :-)
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