Newspaper article THE JOURNAL RECORD

Picking Funds Is Different in Tax-Favored Plans

Newspaper article THE JOURNAL RECORD

Picking Funds Is Different in Tax-Favored Plans

Article excerpt

NEW YORK -- After they've been buying mutual-fund shares in both regular and tax-favored retirement accounts, many investors make the unsettling discovery that their two separate portfolios don't appear to match very well.

Either by choice or by necessity, the funds you pick for your employer-sponsored 401(k) plan or similar tax-deferred retirement program may look nothing like the ones you have chosen to put in your personal savings.

An Individual Retirement Account you started way back in the 1980s may be invested in still another, entirely different, fund or family of funds. But even though this may cause you some extra paperwork hassles, the problem probably isn't as bad as it looks at first. In many cases, the situation may be unavoidable. Most 401(k) plans offer their participants only a limited range of choices among half a dozen or a dozen funds. Thus, chances are the funds you like the most for your own investing just aren't available in your employer- sponsored program. Furthermore, rather than a picture of disorganization, your polyglot portfolio may reflect an important reality: More and more these days, picking funds of any type for a tax-deferred savings program can be a very different matter from choosing one for a standard taxable account. It has long been widely understood that tax-exempt bond funds, however nicely they may fit in your personal savings, make no sense at all in a tax-deferred retirement account. In a 401(k) or IRA, the tax exemption on interest paid by municipal bonds is nullified, and you wind up settling for a lower return on your money than you could usually get from, say, taxable corporate bonds. That's the most extreme example. Now, investors are learning to make subtler distinctions of a similar kind among other types of funds, including stock funds. Consider the rapidly growing category of tax-managed stock funds, which seek in one way or another to minimize the annual capital gains distributions they make to their share owners. …

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