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Investing Specialists

What Goes Where? The Art of Asset Location

Taking care with asset placement can result in big tax savings.

I'll confess: When it comes to matters of money and investing, there are a handful of topics that make my head hurt. One of them is "asset location"--essentially, the placement of investments in taxable or tax-sheltered accounts.

Why is asset location such a sticky wicket? For one thing, the tax treatment of investments changes frequently, so what may be an optimal asset placement today may not be a few years from now. Dividends provide a great case in point. Prior to 2003, income from stock dividends was taxed at the ordinary income tax rate, so you'd generally want to hold income-rich stocks in your tax-sheltered accounts.

But when dividends began to be taxed at the lower, capital-gains tax rate, they were no longer verboten for taxable accounts. As the currently low dividend-tax rates are set to expire at the end of this year, dividend-tax treatment is again up for grabs, so I'd be hard-pressed to recommend that you hold dividend payers in your taxable accounts until there's some clarity on the issue.

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