To build a bountiful retirement portfolio requires several steps: first—perhaps obvious, but often ignored—you have to save and save. A retirement portfolio doesn’t magically appear; you must feed it. Second, you need to invest wisely. That means diversifying—not placing all your eggs in one basket—lest your life savings wind up scrambled. Third—always keep this in mind—you should take full advantage of retirement plans such as 401(k)s, Keoghs, and IRAs.

“Think of those retirement vehicles as containers,” explains Mario Yngerto, CFP, ChFC, a financial planner in Dallas who works with many Hispanics, including a good number who share his Cuban descent. “How much your nest egg will grow depends not only on how much you put in, but also on which investments you choose—in other words, which ‘containers’ you put those investments into.”

Yngerto describes the containers: basic retirement plans, such as the company 401(k), the IRA, or, for the self-employed, the SEP-IRA, SIMPLE IRA, or Keogh. These are all tax-deferred vehicles: you will pay taxes on the profits and earnings, but generally only after age 59, when you begin to take distributions from those accounts. Then there are the Roth IRA and the 529 college plans. Those are tax-free as long as you play by certain rules. (Discuss them with your accountant.) Anything you plunk into those two vehicles can double, triple, or quadruple, and you’ll never owe the IRS a dime. A third container is a brokerage or savings bank account. Except for certain select investments, such as municipal bonds, all earnings will be taxable.

‘How much your nest egg will grow depends not only on how much you put in, but also on which investments you choose—in other words, which ‘‘containers’’ you put those investments into’

Does it matter which container you choose? Lots. Suppose you’re an average middle-class household with a marginal tax rate of 30 percent (federal plus state). Next, suppose you have $30,000 that you’ve already paid tax on and are ready to save. You find an investment—say a corporate bond fund yielding 5 percent—and you put the $30,000 away for 15 years. If that investment is held in your regular brokerage account and you have to pay taxes on the interest every year, at the end of 15 years you would have $50,260. Not bad. But if you hold that same $30,000 bond fund in your Roth IRA and pay no annual taxes or any taxes at the end, after 15 years you would have $62,368—an extra $12,108.

Unfortunately, the amount of money you can put into retirement accounts is still limited. In the most commonly used retirement accounts, the IRA and the Roth IRA, the maximum contribution if you are age 50 or older is $3,500 for 2004 and $4,500 for 2005. Other retirement plans, such as the 401(k) or Keogh, may have higher limits but there is always a cap. You should consult your accountant because the formulas can be complicated.

Given those limitations, which investments should get utmost priority and go into your retirement accounts first, and which are best left out? Consider these principles:

#1:	Any investment that produces a lot of taxable income should be in a retirement account; any investment that creates little or no taxable income should not. “Tax-free municipal bonds, which generate no taxable income, definitely do not belong in your IRA,” Yngerto says. Neither do tax-advantaged vehicles such as annuities or tax-managed mutual funds.
#2:	In general, fixed-income investments, such as CDs and bonds (other than municipal bonds), benefit more by being in your retirement account than do stocks or stock mutual funds. Recall the $30,000 at 5 percent for 15 years example. Bonds and CDs benefit so greatly because their earnings come entirely from interest, and interest is taxed at your ordinary income tax rate. However, the return from stocks, whether from dividends or long-term capital gains—since the passage of new tax laws in 2003—is usually taxed at a much lower rate, typically 5 percent to 15 percent, depending on income level.
#3:	Keep emergency funds out of your IRA. “Any money you think you may need to withdraw in a hurry should be kept out of your retirement accounts,” says Rebecca Preston, CFP, a fee-only financial planner based in Providence, Rhode Island, who is affiliated with the Alliance of Cambridge Advisors, a national organization. The former resident of Peru points out that withdrawing money from a retirement account can be tricky, possibly involving penalties if you do it before age 59 and often triggering taxation.

Be aware of other considerations when deciding where to house your investments, especially the more exotic varieties. Real estate investment trusts (REITs), for example, are best kept in a retirement account. The dividends they generate, unlike stock dividends, are usually taxed as ordinary income. On the other hand, mutual funds principally made up of foreign stocks are perhaps best kept in a taxable account. The U.S. government will reimburse you for taxes your fund paid to foreign governments, but only if that fund is in a taxable account.

Before you decide where to invest, refer to the following basic rules of thumb:

Generally best kept in a retirement account
•	Corporate bonds
•	Zero-coupon bonds
•	High-yield junk bonds
•	Inflation-indexed Treasury bonds
•	Stocks you plan to trade often
•	Real estate investment trusts
•	Mutual funds with high turnover rates

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