Sorry, capital gains is probably an accurate description of the taxes here. Not sure how I can simplify this question but let me try....

Would it make sense to segregate the assets likely to generate a lower tax liability in the taxable 401K while putting the assets likely to generate a higher tax liability (if they were in a taxable account) instead in the tax free Roth IRA?

Maybe I should use an example. Let's say I have 100K today in small cap stocks and 100K today in S&P 500 index. 40 years from now when I retire, let's say the small cap stocks are now worth $1M and the S&P 500 stocks are worth $500k. Wouldn't I have a lower tax liability loading up the Roth IRA with small cap stocks instead of having a mix of both Small Cap/S&P 500 assets in both the IRA and 401K accounts?

This post was edited on 3/4/14 at 4:39 pm

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Posted by agdoctor

Louisiana

Member since Dec 2004

3144 posts

Posted on 3/4/14 at 4:53 pm to GeneralLee

You dont know what the actual return of either investment will be in the future or the tax rates on either. Just because the Roth is tax free today has nothing to do with the future.There is already a lot of rumbling to limit how much you can have in retirement accounts. So my advice would be how you split it doesnt matter.Put money first in the 401k to get any company match. If you are young next contribute to Roth then if you still can go back to the 401k. Personally I never pay a tax that I can postpone.

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Posted by Sigma

Fairhope, AL

Member since Dec 2005

3643 posts

Posted on 3/4/14 at 5:18 pm to GeneralLee

quote:
Distributions from a 401K are taxed as regular income regardless of the type of investment device used in the account. The amount paid as taxes is dependent only on the tax bracket you happen to fall in based on your total taxable income. Roth distributions are tax free regardless of the type of investment.

This is your answer. Although it may make things clearer to use the term "withdrawals" rather than "distributions".

The only thing that governs tax liability is the type of account the money is in, not how you achieved the balance in the account.

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Posted by tirebiter

7K R&G chile land aka SF

Member since Oct 2006

9285 posts

Posted on 3/4/14 at 5:27 pm to GeneralLee

quote:
Would it make sense to segregate the assets likely to generate a lower tax liability in the taxable 401K while putting the assets likely to generate a higher tax liability (if they were in a taxable account) instead in the tax free Roth IRA?

Yes although there could be long stretches of time where large may outperform small, growth may outperform value, fixed income may outperform equity, etc. All you can go by is current tax code and what you are saying could make sense and if you want to change the asset composition within the accounts later you can do so with no tax impact. I wouldn't be concerned about rumblings to limit tax advantaged accounts as when or if it would happen it would be at very high dollar amounts. Besides, we are already limited by the max one can contribute today.

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