Where Your Assets Belong

Published Online: June 1, 2009 - 12:00:00 AM (CDT)

Deciding how to divvy up assets between taxable and tax-deferred accounts has always been confusing and potential changes in the tax code won’t make it any easier. Some of the rules of the tax game, including those concerning dividends, will most likely change under the Obama administration. There are, however, some rules of thumb that are still valid. 

Tax pros note that most interest income is taxable, so you should keep assets that throw off interest, like bonds and bond funds, in tax-deferred accounts. Junk bond funds belong there too, as well as REIT funds, where your gains generally don’t qualify for dividend-income tax breaks. Mutual funds that generate a lot of short-term capital gains also belong in a tax-deferred account. In a taxable account, keep stocks that you intend to hold for at least a year (to qualify for long-term capital gains rates), as well as stock index funds. Your taxable account is also the place to park tax-exempt municipal bonds and muni-bond funds.

What lies ahead on the tax front is anybody’s guess, according to Washington pundits. At one point in the campaign, President Obama talked about abolishing the Bush cuts on dividend taxes, which lowered the rate to 15%, the same as on long-term capital gains. Dividends would then be taxed as ordinary income, as they were before the Bush cuts. Later, he said he would cap the tax on dividends at 20%. Whether Congress will go along with these and other tax-code changes, however, is uncertain.