We All Like Toys And Retiring Rich

by: The Hedged Economist


Don’t say “bah humbug” unless you don’t need the money being discussed.

Simple examples can be more educational than sophisticated tools.

Sometimes playing games and seeing what is possible is productive.

IRAsand 401(k)s, and why the RMD is always with us.

Different assets for different types of accounts.


Giving gifts at about this time of year is a very common practice. This posting is an effort along those lines. The purpose of this posting is quite simple. It is to share two spreadsheets developed in order to assess portfolio performance under very specific circumstances and plan for retirement. It also can be used to illustrate points that are particularly important looking forward. The latter use is more complicated and less definitive, but in many respects, it is the one that's more fun, and it is certainly more important.

On Dec. 18, 2017, Regarded Solutions published a posting that I thought was a very nice gift for the holiday. It was entitled "Retirement Strategy: Yes, You Can Retire With Less Than You Think." It seemed like the perfect holiday gift for a holiday that is, as I put it in a comment, "about the life and teaching of a man who was born in a barn." That posting's message is simple: one can live a happy, productive, and fulfilling life on less than you think. As many of the comments on the posting noted, it is a matter of choice.

This posting is focused on the same choice. However, it focuses on the other end of the spectrum. Rather than address how to retire on less, it's going to focus on how to retire on more than you would expect. Needless to say, it is aimed at helping and motivating younger readers and anyone trying to figure out how to provide for retirement.

In many respects, this posting is quite different from my other recent postings that have focused on managing stock investments. It represents a shift in focus from investment management to personal financial management, specifically retirement planning. Those who are only interested in investment ideas should just skip this posting and wait for the next one which will get back to portfolio management.

Some implications

Now, we all know that at this time year we don't just get toys. We all probably had a grandma who felt obligated to give us pajamas, bathrobes, hand knitted mittens big enough for King Kong's hands, or something else useful and of about the same interest to a kid. So, enough with the toys; here comes the serious reason for the posting.

A previous posting on SeekingAlpha entitled "Dividend Growth Portfolios And Retirement discusses the RMD from the perspective of those near or in retirement. A number of people indicated they were still years away from the Required Minimum Distribution. Consequently, as one person's comment put it, they have been "fooling around" with the RMD. Well, the spreadsheets in this posting are designed to facilitate exactly that: "fooling around." Hopefully, they provide a convenient platform on which one can lend some structure to the exercise. It's worth the effort. One of the implications of simple analyses using the toys in the links in this posting is that it is a mistake for any young investor not to begin thinking about the RMD.

The first thing to do is to just look at the totals that can be accumulated by participating in the programs. It is clear that the programs create the potential for retiring with multi-million dollar portfolios in tax-advantaged programs. There are different ways one can see what the potential is. One is to figure what someone who could've participated in the program from the start would have accumulated if they had worked and continued to participate in the program for some fixed number of years.

Hypothetically, let's use 35 years. If someone fully participated in the IRA program from its initiation and then retired 35 years later in 2010, they could realistically expect to have accumulated half a million dollars in their primary IRA and an additional hundred thousand dollars in a spousal IRA. It's easy to see the potential for between half a million and a million dollars in IRAs. At a 10% return it would be about three quarters of a million dollars. Then add to that the more generous 401(K) programs which, even with only one working participant, could result in an additional couple of million dollars. (Note that by using the starting date for IRAs of 1975, the estimate includes the time when the contribution limits were most meager for IRAs and the years between 1975 and 1981 when 401(K)s didn't even exist).

Alternatively, start 1981 and run out the 401(K) for 35 years and the potential end result is easily over four million dollars. A similar construct from 1981 could be done for the IRA by just dropping the years before 1981. However, it becomes irrelevant to the central point. Participating in these programs can be expected to result in a retirement nest egg of millions of dollars in current dollars. Depending on inflation, who knows what the actual nominal dollar value will be, but it will be big. So, while for any individual there may be years when a 401(K) is unavailable, it is realistic to say that one who fully participates in the program is probably going to accumulate the equivalent of the current value of a couple of million dollars even if there are a couple years where they can't participate. The later those years occur, the less impact it has on the total amount accumulated.

Anyone who undertakes such an exercise and thinks seriously about the implications will reach a couple of realizations. First, if they take contributing to an IRA and participating in 401(K)s seriously, there is a good chance that they will accumulate a substantial portfolio in tax-advantaged vehicles. Second, if they rely only on deductible tax-deferred aspects of the program, they're going to build up a huge tax liability that will be unavoidable once the RMD kicks in. Third, it's not too soon to be thinking about the mix of pre-tax and post-tax contributions or the mix of Roth versus traditional program participation. Those readers who only want bathrobes and pajamas can skip to the final section where there are some ideas on how to manage the issue. However, there are plenty of opportunities to play with the toys before getting on with the seriousness of the issue.

The structure of the presentation

The posting will proceed by describing the spreadsheets, and, only then, will it discuss the potential games one can play using the spreadsheets. Gift-giving is tricky business; one can never be sure how the gift will be received. If one needs an example, all one has to do is consider the tax cuts currently being contemplated. Although they will result in more money in the pockets of most taxpayers, they're exceedingly unpopular. It's a fine illustration of looking a gift horse in the mouth, but it's legitimate. Everyone is entitled to their own opinion and their own judgment even if that judgment isn't in their financial self-interest.

Similarly, if after hearing what the spreadsheets contain one is uninterested, it would be appropriate to just move on to something else. Those inclined to mock the triviality of the spreadsheets should be aware that I realize the spreadsheets may not be earth shattering. However, they have been developed and are readily available to anyone who wants to play with them. They can be very useful in terms of assessing and planning one's personal finances.

Much of the discussion of the spreadsheets is presented in terms of tax-deductible, tax-deferred IRAs and 401(K)s. There are points where some of the benefits of the programs are slightly different with Roth IRAs and 401(K)s. However, the spreadsheets are totally unaffected by whether contributions are made pre-tax or post-tax. However, as one reviews the accumulations that occur from participating in the programs, it becomes apparent that investors need both Roth and traditional tax-deferred investments if one wants to maximize the benefits of participating in the programs.

What is on the other end of the links

The first link in the text below leads to a spreadsheet that relates to IRAs. The first column on the spreadsheet shown as the 'worker' tab shows the amount that one could contribute to an IRA for every year since they were first made available in 1975. Anyone unfamiliar with the history of IRAs should take a moment to review the column. It says a lot about how Washington politicians view investing. Initially, the IRA deductions were highly restricted and very miserly. The great fear among many politicians was that the wrong people, not their constituencies, might take advantage of the tax-advantaged savings opportunity.

In fact, for a number of years after IRAs were first made available, there were numerous articles and rants by politicians about how the rich were taking advantage of this tax "loophole." Consequently, despite a period of raging inflation, during the first seven years of the program, the deductible amount remained rather miserly, and there were unnecessary additional restrictions to ensure that wage earners didn't save too big of a portion of their income in these tax-deferred programs. Yes, the government was actually afraid that people would save too much for their retirement; just another example of the dynamite forecasting capabilities of those formulating public policy.

The second column of the spreadsheet shows the catch-up contributions that could be made by older individuals since 2002 when the government realized that perhaps people were not saving too much for retirement and need to catch up. The third column is simply the maximum contribution implied by the first two columns. The remainder of the spreadsheet shows the cumulative total that would be available in the IRA under various return assumptions ranging from 4% to 10%.

The second tab entitled 'spousal' replicates the same spreadsheet design for the maximum allowed under spousal IRAs since their creation in 1982.

There was no particular reason for limiting the maximum return assumption to 10% other than a desire to show the cumulative balances even under limited return assumptions. The spreadsheet ignores any limitations on contributions other than the maximum. It should be noted that initially IRAs were only available for individuals not covered by a pension. Further, they were initially constrained by limitations on the percentage of one's earnings that could be contributed.

For those who just want to inspect the spreadsheet without first considering how it could be used, it can be found here:(https://spreadsheets.google.com/ccc?key=0AnZfhzwt5JapdENjcGVZcTFoS1lIZWtHTGxLemo4YkE&hl=en&authkey=CMbqjukO ). An interesting toy for the holiday. Please download it rather than using it where it is.

The second spreadsheet is a somewhat analogous presentation related to 401(K)s. The spreadsheet begins with 1982 when 401(K)s first became available. The first column shows the maximum tax-deductible contribution rather than an absolute maximum. There is a second column for catch-up contributions that can be made by older workers since 2002. There is only one tab since in the case of 401(K)s, the major consideration for couples is whether 401(K)s are available to both workers through their respective employers.

In many respects the 401(K) spreadsheet is more complicated and less definitive than the IRA spreadsheet. As was explained in the initial presentation of the spreadsheet:

"It's a lot more difficult to construct a spreadsheet like the IRA toy for a 401(K)…. With 401(K)s, our wizards in Washington have played around with limits: thus, there is no hard-and-fast maximum to put in as a placeholder. First, the max was a max on total employee and employer contributions, and then in 1987 they put a max on employee contributions."

"Through the history of the 401(K) the government has encouraged, regulated, and generally messed around with the portion of wages that could be contributed pre-tax. There is also the issue of whether a specific plan allows non-deductible contributions. Many plans used the pre-tax limits to set the max, thus reducing the max to a percent of wages rather than a dollar amount."

"Most crucial of all, each employer can select the structure of their plan. Contribution limits can also be affected by who else contributes. So, there isn't a typical contribution limit." Despite all the limitations, as is stated in the initial presentation, when it comes to 401(K)s or their equivalent, "the issue is too important to an investor to ignore." Consequently, despite the limitations inherent in developing the spreadsheet, it's worth reviewing and working with it.

In the case of the 401(K)'s rate of return, the calculations go to 12% rather than ending a 10%. With employer matches, 12% is an easily achievable rate of return. As with the IRA-related spreadsheets, the maximum shown ignores limitations that may be placed on contributions by employers or the level of wages of the individual. Further, the maximums are the maximum potential tax-deductible contributions. After-tax contributions are allowed in some 401(K) programs and are totally ignored in the spreadsheet.

Anyone who wants to inspect the spreadsheet can find it here: (401k backcast). Please download it rather than using it where it is.

Why the spreadsheets were developed.

The IRA spreadsheet (IRA Backcast) is an update of the spreadsheet presented in a posting on The Hedged Economist dated December 25, 2010, and entitled "Investing PART 5: Oldies: When looking back is most valuable." (Investing PART 5: Oldies: When looking back is most valuable.) In general terms, the purpose of developing the spreadsheet at that point in time was to "take current period data and imply something about history." Even then, it was an update of spreadsheets I developed years earlier to help plan for retirement.

The spreadsheet can be downloaded live which then allows one to play with the assumptions regarding contributions. Most people know, or can calculate, how much money they contributed to their IRA each year. If not, it can be taken from tax filings for each year. If none of those options are available, the spreadsheet should make it easier to estimate since it already provides the maximums that could've been invested. If the investor has mixed rollover and contributory IRAs, estimating contributions gets a little bit harder, but the approach still works.

Most investors also know what their current IRA balance is. Many know what their return has been recently or in specific years, and calculating the percentage return for any given year is quite simple since most IRA trustees provide a beginning and ending balance each year. However, not all investors know what their compound average rate of return has been over the life of their IRA. It is this last issue that is the focus of the spreadsheet.

Using one's current balance in an IRA and history of contributions, the spreadsheet made it quite easy to estimate the rate of return over very long periods of time.

In the 2010 postings where the spreadsheets were first presented, a subsequent posting showed the cumulative average growth rate of the S&P 500. By comparing the two, it was very easy to analyze whether managing the portfolio in the IRA was justified given the alternative of just putting it into an index fund.

However, estimating the portfolio performance is only one potential use of the spreadsheets. As that original posting put it:

"If you think such self-analysis is irrelevant, good luck; you can skip this posting. But, before you dismiss self-analysis, consider whether the volatility in asset prices over the last few years caused you to reconsider your asset allocation. [Keep in mind the posting occurred right after the crash of 2008]. If that doesn't convince you, consider which is more important to retirement planning: when you start or your rate of return? If you're short of your retirement goals, is it just a bad patch for your investments or is it the amount you're saving?"

While the spreadsheet shows the maximums allowed in any year, there were quite a few years where some people with pensions, 401(K)s, low wages, or high incomes couldn't make the maximum contribution. So, the spreadsheet can be adjusted to enter any contribution level. For example, depending on your age, 1975 may be interesting history, but irrelevant. Similarly, catch-up contributions may be irrelevant. So, the actual entries and calculated balances are of passing interest; the spreadsheet is a tool (or toy) not an answer. One can just delete the entries that are irrelevant, and the spreadsheets will automatically recalculate new ending balances. One can enter what actually was feasible and was contributed. Thus, it allows quick comparisons of actual experience to what would've been possible given the maximum contributions. For example, if one skipped one year's contribution, is very easy to see what the impact on the end balance is.

Reports in the media, articles in newspapers and news magazines, and more than a few postings on financial websites such as SeekingAlpha have addressed how to motivate young investors to start investing early and to learn the habit of investing regularly. The articles in news magazines tend to focus on the basics of financial management and public policy considerations. The reports in the media are usually sensationalized simply to get attention, and the SeekingAlpha articles often take the form of reports on hands-on efforts of established investors to help younger investors build a portfolio. The IRA spreadsheet is a very effective way to show young investors the importance of starting early and consistently investing on a regular basis in a very real world example that is easy to relate to.

For older investors with a long history of participation in the programs, there is a fairly simple feel-good exercise. Cut off the beginning of the spreadsheet to reflect when you first started an IRA. Note the resulting total current values. Then eliminate the first few years of contributions. Again note the total current values. Then put the first few years back in, but eliminate all the catch-up contributions. Note the current values. Compare the results of the two and suddenly the hardship/foregone consumption/deferred gratification implied by those first few years of contributions won't seem very important. It can be seen that the early contributions might eliminate the need to make far more substantial contributions later on, and the dollar value can be easily calculated.

Using the full history facilitates "what if" scenarios. It's quite easy to show young investors the importance of starting early. One can calculate the difference in the current dollar balance that results from changes in the start date. For example, take out the first five or ten years and compare the result to the differences in results associated with different rates of return. (For example, taking out the $7,500 allowed during the first five years when contribution limits were lowest has an impact roughly comparable to a couple percentage points in average return, just slightly less). It's very easy to show how naive it is to assume one will overcome a late start with investment genius.

It's a very useful tool (or toy) for showing people that, in many cases, it makes more sense to just begin investing even if it means accepting a slightly lower return while one "learns what one is doing." It's better than waiting until one feels sure one can beat the averages. At the sample rates, the initial $7,500 (less than 9.5% of all contributions) accounts for from almost a fifth to almost half the balance in 2009 after the "great crash." Such is the impact of compounding.

Using the spreadsheet for the period up to 2009 is a very convenient way to show how a one year drop in value changes the lifetime average rate of return (no change at all to at most a couple of percent depending on when it happens). Remember, at the end of 2009, the market had just experienced a drop of almost 40%. I listened to more than one person try to argue that 2008 wiped out years of investment gains. One would have to really fiddle the numbers to get that result. Although the dollar value appears great, the impact on the lifetime average rate of return is minimal. Don't get me wrong. A couple percentage points of return is important when compounded. However, it isn't the end of the world, and it isn't a great loss given that the market recovers. It's a strong argument for staying invested.

One can also use the spreadsheet to make judgments about levels of saving required. If the spreadsheet shows a historical rate of return of 6% or 8%, that can be used as a reasonable assumption to forecast out the value of the current balance at any given future date. It would be naïve to assume that one is going to achieve some hypothetical market rate of return if the historical data demonstrate otherwise. If the rate of return of 6% or 8% is over a long enough period of time and complete market cycles, it may be a better forecasting approach than using some of more sophisticated Monte Carlo simulators. It takes into account one's own portfolio mix and trading experience. No simulation can replicate one's expected trading experience, but using the results of one's previous experience is a reasonable approach. We all hope to learn from experience, but as the saying goes: "Hope is not a strategy."

Alternatively, the tool or toy is, in many respects, easy to relate to because everything appears in current dollars even though it occurred at different real dollar values. For example, one can say that if one maximizes IRA contributions and the government is as generous in providing IRA opportunities in the future as it has been in the past, one can expect the equivalent of the present current dollar value of the calculations shown in the spreadsheet. The nominal dollar value in the future will, of course, be far greater, but it can reasonably be represented by the current dollars that were accumulated historically. Otherwise, one has to make rate of return assumptions, inflation assumptions and assumptions about how policy will shift other than the general statement that it will resemble the past policy shifts. So, while it's a brute force way around having to make those assumptions, it presents a starting point, or the spreadsheet can be used to generate information that can be used to supplement some of the more "sophisticated" retirement planning tools.

The spreadsheet also presents a counter-argument to a very common line of reasoning. It is very easy to assume that the current higher contribution limits automatically eliminate the need to maximize contributions. A maximum contribution of $5,500 may seem like a lot of money, but I guarantee that $1,500 in 1975 also seemed like an insurmountable obstacle. In fact, in 1975 there were many people who couldn't make the maximum contribution because the constraint on the portion of their wages that they were allowed to put into the IRA; nominal wages were that much lower. Using the maximums as an alternative to deflating or inflating the dollar figures is just a different way to eliminate the money illusion, but it's one that an individual can relate to without any thought about inflation.

It's also worth noting that the spreadsheet provides a way to make a rough estimate of the impact of the tax deferral on the ending balance. A tax rate of 12.5% would reduce the rate of return by about 1%. At a tax rate of 25%, it makes the equivalent of approximately a 2% difference in rates of return. (Those calculations actually come out exactly when one uses 10% as the rate of return). Of course the percentage impact would vary depending upon the rate of return, but the spreadsheet provides a very easy way to calculate a rough estimate of the total dollar impact over any selected investment horizon.

Keep in mind that the spreadsheet at the end of the link is nothing more than a toy. Unlike complete, new-in-the-box collectibles, it's a toy that's only valuable and useful if one plays with it. Fooling around with it can shed a lot of light on constructive personal financial behavior.

The second spreadsheet (401k backcast) is analogous to the first but addresses 401(K)s. It's an update of the spreadsheet developed to support a posting on The Hedged Economist dated December 29, 2000 and entitled "Investing PART 6: Perhaps some seasonal music" (Investing PART 6: Perhaps some seasonal music). The purpose of the posting on 401(K)s is quite different from the purpose of the posting on IRAs. The theme in the posting on 401(K)s, as stated in the initial posting, is: "Don't look a gift horse in the mouth."

The posting goes on to point out that: .."401(K)s (or their equivalents -- 403(B)s, etc.) are widely available. They weren't created for the rich. They were set up to benefit 'the working man.' In fact, there are numerous obstacles and limitations on high income earners' ability to benefit from them. So, when people say they don't/can't contribute to their 401(K)… , if you want to start a raucous, ask if it's because they're too rich. But, don't be surprised if 'the working man' insists on staying 'the working man."

Although the spreadsheet on 401(K)s is inherently less flexible, less likely to relate directly to any individual's experience, and consequently less useful, 401(K)s are one of very few instances where an investor is guaranteed a return. Further, the return is not a small or trivial matter. For starters, one of the most widely understood features of 401(K)s is their potential tax deductibility. Depending upon one's marginal tax bracket, that can be a guaranteed return of anywhere from 10 to 50% under current state and federal tax laws. It's amazing how many people will forgo a 10% to 50% return in order to be able to spend money immediately rather than in retirement.

In addition to the tax deductibility of contributions, the earnings on the investments are tax-deferred. One can use the same approach discussed in connection with the IRA spreadsheet to estimate an impact of the tax deferral on the retirement balances under various assumptions about returns and tax rates. Because the balances that can be available on 401(K)s can be much larger than those for IRAs, the dollar value of that tax deferral can be extremely significant.

There is more benefit to 401(K)s. As presented in the initial posting, "But, like the late night direct sales commercials shout: "Wait, wait there's more." No, it's not free shipping. It's the potential of an employer contribution. The employer contribution is optional and varies with your employer's fortunes, but who else is giving you money just to do what you should be doing anyway?" It's hard to imagine a situation where one could put aside the thousand dollars and immediately have not only that thousand dollars but an additional couple hundred dollars of employer match. It's even harder to imagine that people will pass out that opportunity, but they do.

It's reasonable to ask why the 401(K) spreadsheet stops at 12% given the potential for employer matches that could substantially increase the expected return. The reason is quite simple. As the spreadsheet shows, 401(K)s have so much going for them (tax treatment, employer matches, automatic deduction of contributions from your wages, and higher limits on potential investments) that one doesn't need to reach for high returns in order to achieve a substantial nest egg.

With 401(K)s the problem is quite different than with what IRAs. One can always contribute to an IRA as long as one has income. However, continuous access to a 401(K) over one's entire career may become common, but it hasn't been most people's experience. It was quite common for there to be waiting period before one could participate in a 401(K), and continuous uninterrupted employment with a single employer isn't realistic for many people. Consequently, getting all the contribution histories, or estimating what they will be, is a chore. Thus, a substantial portion of the benefit of the link to the 401(K) spreadsheet is that it shows the potential wealth-building opportunity 401(K)s represent. As stated in previous postings, 401(K)s may not present the greatest investment opportunities in the world, but they are one of the greatest tools for accumulating investments available to most people.

One can construct many "what if" scenarios similar to those discussed in connection with IRAs by playing with the 401(K) spreadsheet. For example, I used the spreadsheet to take out years when I worked for employers who didn't offer a 401(K). When there were waiting periods before one could participate in a 401(K), the spreadsheet can be used to estimate what the impact was on 401(K) balances of the job change. Similarly, some programs that I participated in had constraints that made it impossible to contribute the maximum. They're easy enough to enter into the spreadsheet and calculate the impact of the constraints under various return assumptions.


Playing with the spreadsheets at the end of the links won't make one a better investor. However, the insights that can be gained from such a simple toy could lead to better personal financial management. In fact, because the spreadsheets automatically link differences in rate of returns and differences in saving/investing behavior, the spreadsheets shed light on the very issue of the relative return to better investing versus intelligent financial management.

Personally, I believe there's much more to be gained from spending an hour or two playing with the spreadsheets and contemplating the impact of alternative financial management approaches than spending the same amount of time assessing a particular investment. What's most interesting about the spreadsheets is that those who best understand the potential benefit of playing with this little toy are the same individuals who don't need the lessons it can illustrate. For them it may make sense to use time to investigate a particular investment or think about the implications for portfolio structure.

Implications for portfolio structure

Now were through playing with the toys and we're left with pajamas, bathrobes, and mittens. It's been said that the only sure things in life are death and taxes. However, there's one other sure thing, and that is that the wizards in Washington will fool around with taxes and any other program they get their hands on. Consequently, the implications for portfolio structure that are discussed herein are couched in general terms that should be robust enough to withstand the fiddling of our elected officials.

The first implication is that, for many people, a taxable account should not be viewed as a primary investment vehicle. At a minimum, they can probably contribute to IRAs and if they're lucky, a 401(K) or its equivalent. Nevertheless, there are advantages to having a taxable account, tax-deferred IRAs and 401(K)s, and Roth retirement accounts. For starters it provides the flexibility to respond to whatever changes Washington makes in the programs. So, that raises the issue of which types of assets should be in which accounts. That will be discussed in general terms with some examples.

It makes sense for taxable accounts to include not just cash required for emergencies, but that is one of the things that should be in taxable accounts as long as the Fed continues to make sure that cash and cash equivalents earn next to nothing. It's legitimate to say that just cash and cash equivalents don't really represent investments under current conditions. So, what type investments should be in the accounts? The exception to keeping all of one's cash in taxable accounts occurs when one approaches that RMD. It makes sense to have enough cash in one's tax-deferred accounts to cover the RMD through a market cycle when combined with a realistic dividend flow from the other holdings in the account. One doesn't want to be forced into selling assets during a down cycle. However, with that one exception cash doesn't belong in retirement accounts.

It makes sense for high growth, low or no dividend stocks to be in the taxable account. They mainly present a hedge against the negative impact that inflation has on the cash in the accounts. It doesn't need to be a large holding of stocks. However, stocks like Berkshire Hathaway B (NYSE:BRK.A) (NYSE:BRK.B), Amazon (AMZN), Facebook (FB), and Alphabet (GOOG, GOOGL) are suitable to offset the risks associated with cash. They can be very volatile while the cash is just the opposite. They are not experiencing a negative effect of inflation while the cash is. They're not paying any dividends that would generate a tax liability, and all of the gains are in the form of capital gains which are still extremely tax efficient under current law.

If one is inclined toward mutual funds rather than individual stocks, it is quite likely that all taxes cannot be avoided. However, index funds and tax-managed funds would be a logical, but, in my opinion, inferior alternative approach. Examples would be a total market index fund or a small cap index fund. They have the advantage of paying lower dividend yields than the more established S&P 500 companies and hold the potential for greater capital gains. If one is primarily invested in dividend growth stocks end higher yielding stocks, a small-cap mutual fund is a good diversifier. Consequently, if after funding IRA and 401(K) is difficult to fund a taxable account, the diversifying impact of the small-cap mutual fund could well justify including it in your 401(K) if it is a plan option.

The traditional accounts (IRAs or 401(K)s) are tax-deferred rather than tax-free. It makes sense to hold the higher-yielding stocks in tax-deferred accounts. Also, if one holds balanced funds or bond funds that have higher yields, a traditional retirement account is a logical place for them to be. Stocks in utility companies, telecommunications, REITs, pipelines and other high-yield equities also seem appropriate. In my portfolio, Verizon (VZ), TransCanada pipeline (TRP, Enbridge (ENB), Welltower (HCN), National Retail Properties (NNN), Ford (F), and some of the consumer staples, like General Mills (GIS), are examples of stocks I wish that I held in tax-deferred IRA accounts. However, as explained below, I'm still in the process of sorting out which holdings I want in a tax-deferred versus the tax-free accounts.

There are two reasons for recommending that the higher-yielding stocks and bonds be held in tax deferred accounts rather than the tax-free accounts. First, at some point RMDs will be a reality for every investor unless the law is changed. When the RMD kicks in, it's very convenient to have the dividend flow be adequate to cover the RMD. It eliminates the necessity of timing sales of assets and selecting which assets to sell. Second, it eliminates the possibility that the investor might end up paying taxes at their regular tax rate on gains that resulted from appreciation in the stock values which otherwise would have been treated as capital gains. Withdrawals from traditional retirement account are taxed at the test player's regular tax rate regardless of whether they represent initial investments, dividends earned, or capital gains.

Roth accounts are an excellent place for dividend-growth stocks and dividend-growth stock mutual funds. Examples of logical stocks for a Roth account include Boeing (BA), 3M (MMM), PPG (PPG), Honeywell (HON), and McDonald's (MCD). Interestingly, depending upon how long one has held stocks like Microsoft (MSFT), Intel (INTC), Johnson & Johnson (JNJ) and some of the consumer staples, like Pepsi (PEP), they could logically have been put into either the tax-deferred or the Roth accounts. The advantage of placing the dividend-growth stocks in the Roth accounts is that the future higher payments can be withdrawn tax-free. The theory is that the dividend-growth stocks will have higher payouts at some future date.

There are important disclosures appropriate for this section. I am not a CPA or tax accountant. So, the opinions expressed here are simply those of an investor. Also, the stocks referenced are all stocks I own, but their reference is as examples and should not be understood to be recommendations to buy. I invite commenters to identify like stocks that they consider more timely purchases.

There is one final issue that an investor has to address regarding account structure. Regardless of what holdings the investor would like to have in different types of accounts, there can be other constraints. An employer may offer a traditional 401(K) without a Roth 401(K) option. That guarantees that a significant amount of the accumulation will occur in a traditional account. Under those circumstances, it would make sense for the IRA to be a Roth account. However, an employee may not have access to a 401(K) and a high income employee may not have access to a Roth. So, personal circumstances can vary so significantly that advice beyond maintaining flexibility by holding all three types of accounts doesn't go very far. Yet, the benefits of holding the right assets in the right types of accounts exist regardless of how personal circumstances affect the feasibility of having accounts of different sizes.

For much of my career I only had access to traditional tax-deductible, tax-deferred retirement options. Consequently, I am still sorting out assets in order to get them into the right accounts. (I plan to identify which stocks are and what type of account in a subsequent portfolio review). Further, I had to put a lot of effort into the tax management of conversions from traditional to Roth accounts. From first-hand experience, I can say it's a pain, and it is potentially expensive. As a consequence, I am acutely aware of tremendous advantage offered currently to those who have access to all three types of accounts while they are still accumulating their retirement funds. However, young investors need to constantly be thinking about the appropriate way to hold various assets. Otherwise, they will blow the tremendous opportunity they're being given.

One thing is very apparent; any investor, regardless of his or her age, should carefully analyze any opportunity to convert from a traditional to a Roth account that arises during their career. Each job change represents a time to consider whether to roll 401(K) into an IRA and whether to convert from a traditional to a Roth. In doing so, is very possible to get very good tax advice, but that tax advice inherently includes assumption about the degree of stability in the tax treatment of different types of accounts. When it comes to predicting what politicians will do, no one has a crystal ball, but, as with selecting investments, we all have to do the best we can.

In any case, have fun and enjoy the holiday.

Disclosure: I am/we are long ALL STOCK MENTIONED.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.