Allocating Stocks/Bonds between IRA & Taxable Accounts

[spider]

If you have a mix of taxable and non-taxable (IRA) accounts and keep some money in bonds or other income generating assets, it might be preferable to keep the bonds in the IRA and the stocks in the taxable account, or vice versa.

I was unable to find much advice about this on the web, so decided to make a simple spreadsheet:

Google Spreadsheet

The part in yellow compares the total return over time of two simple allocations. The first, "bonds in taxable", assumes you have 5k each in stocks and bonds, and put the 5k of bonds in the taxable account and the 5k of stocks in the non-taxable (IRA account). The other line is the exact opposite.

My basic assumptions:
* bonds earn 5%
* stocks earn 10%
* bonds taxed at 30% annually
* stocks taxed at 15% when sold

I chose 30% for bonds since almost anybody owning stocks will have a rate from 25% to 35% and a high percentage will be at either 28% or 33%. Note also that you pay taxes on bond interest every year, even if you don't sell, whereas with stocks you only pay when you realize the sale, so the effective tax rate can actually be less than 15%.

To summarize the results very quickly, I find that it really doesn't matter much how you allocate between taxable and non-taxable accounts. The fact that stocks have a lower tax rate argues for keeping them in the taxable account, but the higher rate of return argues for keeping them in the non-taxable account.

Any comments or corrections are welcome. It certainly is possible to change the assumptions but I feel they are all pretty reasonable. The main one I would question is the capital gains rate in the future. 15% is quite low by historical standards and is set to rise to 20% in 2011 (when all of the Bush tax cuts are scheduled to sunset). I don't think capital gains rates are going to go way up, but with democrats likely taking over, it seems very likely they will be back in the 20% to 25% range, and there is at least a chance they would be taxed at regular rates, at least for those in the top brackets.

[spider]

Just want to bump once (that's all) and note that what I didn't talk about in the OP was how your investment/trading style can matter. Specifically, while it may not matter how you allocate between IRA & taxable if you are just long term buy/hold, it can matter if you trade more.

For example, let's say that I have a volatile stock which I could easily sell in the next year or two if it rises (GOOG) and another that I expect to own at least 10 years (BRK.B). In that case it would be clear that I should put GOOG in the IRA and BRK.B in the taxable. Especially since I might hold GOOG less than a year and would have to pay regular tax rates if I sold.

Although... if I think GOOG is volatile enough that it might fall in the short run, that then argues for putting it in the taxable account since I could then sell it and take a tax loss.

So in summary, maybe it ultimately doesn't matter that much, but I've found it interesting to think about and would welcome any comments or criticism!