What is the importance of coordinating investments within and outside your 401k retirement plan?

Can you describe a situation where this would be important. Thank you for your help with understanding this kind of retirement plan.



I don't know your age, but eventually you may want to include bonds in your asset allocation. The type of bonds you buy (or bond mutual funds) depends on the tax status of the investment vehicle. Treasury strips (zero coupon bonds) and inflation-protected bonds are easier to handle (tax wise) in a tax deferred account - it makes your tax situation easier; and junk bonds so you defer tax on the high yield. Municipal bonds should be in a taxable account (since they are not taxable). If you put a muni in an IRA you convert tax free income into taxable income - bad move.





Stocks held long term should be in a taxable account so that you control the capital gains timing and get a lower tax rate for the capital gain. A $10k capital gain in a 401k is taxed as ordinary income when distributed, which is OK if you're in a much lower tax bracket after retirement (that was true in the past, but may not be in the future). In a taxable account pick mutual funds that are tax efficient, like index funds; put the fast trading mutual funds in an IRA to shelter the short term gains that trading generates.




Robert and Luigi gave the main reasons.





One, you have to look at your investments and risk profile in total. That includes ALL your debts and income too, in order to make a real financial plan. So that is not just 'investments". For instance if your house is paid off or you have a high income you can stand more risk and invest more in stocks.





And then there is the tax aspect. Buy and Hold stocks with unrealized capital gains is a type of tax deferral but with after tax money. So you want those outside your tax deferred plan while the part, like bonds, high income funds or high dividend stocks, you want in the plan so you don't pay taxes on the income.





Then last this also depends on your income tax bracket at the current time. Sometimes if your bracket is real low while young and starting out you might want to pay more taxes now than later when you are in a higher bracket as most people are as they age.





Good Luck.




The most important factor in your investment plan is asset allocation. It is very important to view and allocate as a whole. I cannot think of a situation where it would NOT be important.




Your 401k and your investments outside your 401k are probably managed by different brokers. Therefore you need to coordinate the accounts so that your overall investment strategy matches your desires.