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Our biggest concern though now is what is the best thing we can do with our money to cut our tax bill as well as save for the future.

By now I think we've pretty well covered the "don't throw money after deductions; it's dumb" part of tax avoidance. So let's look at some things that you can do to both fatten your pockets and keep taxes at a minimum, always remembering that if you're paying more taxes you're making more money. Borrowing from Martha Stewart, "That's a good thing."

You can hold investments for the future in retirement accounts and regular taxable investment accounts. Where you keep which investments can help reduce your current tax bill. Coupled with this you need to think about your plans. For example, maybe you want to take a special trip to celebrate a special anniversary, or one (or both) of you would like to retire early. As a reformed spendaholic I'm death on nonmortgage debt, so if you anticipate some major spending before you're 59 1/2 you want that money in nonretirement accounts where you can get your hands on it without penalty.

So, back to taxes. Current tax law favors long-term capital gains and qualified dividends. In addition with respect to individual stocks, you don't have any taxable income except dividends until you sell. On the flip side, all distributions from retirement accounts are ordinary income, even if the source of earnings was LTCG. So, a taxable investment account is a good place to hold LTBH securities and tax-efficient (e.g., index) mutual funds. Retirement accounts are a better place to hold investments that yield a lot of ordinary income, such as bonds and REITs.

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