Dear Dagen: Bush's Tax Cut and Your Portfolio

Next, you can think about keeping any taxable bonds or bond funds in those retirement accounts. Start with the least tax-efficient investments first, such as high-yield bonds, and work your way down. Remember: The more income you get off a bond fund, the bigger the tax liability.

Then you're left with your regular old taxable brokerage and mutual fund accounts. Index funds, tax-managed funds and stock funds that have historically delivered low taxable distributions should go there. And, of course, municipal bonds, which already deliver tax-free income, can be kept in those accounts as well.

So you should keep taxes in mind, but you cannot let them dictate what you should buy.

Don't Chase the Headlines

The dividend tax cut is exciting. But you don't need to fill your portfolio with dividend-paying stocks exclusively. And if you have decades to invest until your retirement, Treasuries shouldn't dominate your 401(k) plan. You should make more money in stocks over the long haul, especially given that the yield on the 10-year Treasury is close to a 45-year low. Earning 3.33% a year on a bond for 10 years just isn't that appealing.

The drawbacks of blindly following a tax-centric strategy are too numerous to mention. You certainly don't need to start selling securities in your taxable account to buy similar investments in a retirement plan or vice versa. You could be creating a tax liability unnecessarily. And maybe your 401(k) doesn't even have, say, a high-yield fund you would want to own.

In the wake of the recent tax code change, you shouldn't dramatically change the way you invest. "But the after-tax return for taxable accounts is going to be higher going forward," says Vanguard's Kinniry. "With no increase in risk, investing became a better proposition for everyone."