Asset Location — tax-deferred or taxable?

Hi Terry,

I was wondering if you could please answer an asset location question for tax efficiency during retirement. I’m not sure where to put 4 equity funds – in tax deferred or taxable accounts.

Two are passive managed index funds: VTSMX and VFWIX. These should go in personal taxable accounts, right?

The other two are actively managed funds: VDIGX and AKREX. Should these be in taxable or tax deferred accounts?

Thank you in advance for your time and I look forward to your reply.

Terry Says:  I can’t imagine why it would make a difference in your decision making as to whether the funds are actively or passively (index) managed.  These are all exposure to the stock market.  As you know, if you hold stock funds for a period of longer than one year and sell at a profit, you can pay taxes at the much lower capital gains rate.  And if you have a loss, you can deduct up to $3,000 a year on an individual return against ordinary income.  All withdrawals from a tax-deferred (IRA, 40l(k)) account are taxed as ordinary income.   But in they meantime, any dividends or gains compound tax deferred.  And any distributions of income or cap gains from the fund are also growing tax-deferred.  And your tax-deferred account (except a Roth) will require that you start taking withdrawals at age 70-1/2.

To the extent that index funds trade less frequently, and thus might distribute fewer gains, you might be a bit better off holding them in after-tax accounts.  But the real decision is one of balance of your total financial picture — having some assets growing in a way to harvest capital gains, while enjoying tax-deferral on others.  After all, you do hope to have gains in ALL of these equity funds, don’t you?!!