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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).


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:

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

- 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
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


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