Know where to hold 'em.

Changes in capital gains taxes can work to your benefit. Here's how.

You have a tax-free retirement account, say a 401(k) or individual retirement account. You're also saving up on the side and have put money to work in the stock market. Needless to say, you want to get the most from your investments while paying the least amount of tax on your gains. How do you spread your investments among your accounts?

To start, let's look at how financial planners would have guided you in the past. Before, investments with a tax break, like municipal bonds, belonged outside your tax deferred IRA or 401(k) plan. After all, they were already tax-exempt and didn't need any additional protection from the tax collectors. Stocks, mutual funds and bonds whose gains were taxed fully, however, fit into a tax-deferred account where their returns could grow without any interference from Uncle Sam. Otherwise, you'd lose a very large portion of the money you made from your investment. For example, taxed at the 28% capital gains rate, a 12% rise in the value of XYZ Corp. amounted to 8%. While safe inside a retirement plan, that 12% would compound tax free until money was withdrawn.

What was a clear-cut decision in the past suddenly became more complicated beginning last year. The reason: The long-term capital gains tax, the amount you owe Uncle Sam after a stock or bond has appreciated in value over time, was cut. Now instead of paying the IRS up to 28% of that rise in a stock or bond's value, you owe only 20%.

Compare the capital gains cap of 20% to your ordinary income tax rate--28% on up to 39.6%--and you actually stand to make and keep more of your investment dollars by keeping stocks outside your retirement plan. So if you've made $20 selling off IBM stock you bought two years ago, the IRS gets only $4. Whereas, if you were retiring tomorrow and had to tap the same stock from your IRA portfolio, you could lose anywhere between $5.60 and $7.92 to Uncle Sam. State taxes make the difference between tax rates even greater by taking as much as an additional 30% from the money you remove from your retirement account.

All of which makes decisions about spreading money around in your accounts all the stickier. Percy Bolton, a certified financial planner in Los Angeles, recommends that clients hold taxable bonds inside tax-deferred retirement accounts and stocks in taxable accounts. For people who are almost 100% in stocks, he recommends that they hold small-capitalization and international stocks in a taxable account since they tend to pay off in long-term capital gains. "Large-cap stocks, which are more likely to pay dividends, work better inside an IRA or 401(k) where the dividend income won't be taxed immediately," he says.

If your investment mix is primarily mutual funds and individual stocks, Bolton says try to keep to funds within your retirement plan. "Mutual funds make capital gains distributions that investors can't control, so holding them inside a plan will shield those distributions from current taxation."

To illustrate, we'll provide an example. Consider two investors, Joe and Joan, who both:

* Have $20,000 to invest--$10,000 in an IRA and $10,000 in a taxable account.

* Divide their investment money 50-50 between stocks and bonds.

* Pay ordinary income taxes at 40% (including federal, state and local taxes).

* Invest their bond money in Treasuries yielding 6%.

* Invest their stock money in individual issues that yield 2% each year and appreciate a further 8% per year.

* Hold on to their stocks throughout the 20-year period.

Joe decides to hold his stocks inside his IRA, while keeping his bonds outside. Joan goes the opposite way: bonds in, stocks out.

According to the Boston accounting firm Brown & Brown, at the end of 20 years, the results will look like this:

                     Joe             Joan
                     (Stocks In,     (Bonds In,
                     Bonds Out)      Stocks Out)

IRA                  $672,750        $320,714
Taxable acct.        $202,859        $591,678
Total                $875,609        $912,392
After retirement     $673,784        $816,178
(30% tax rate)

"Logic would dictate," says Carolyn Stall, a CPA and certified financial planner with Brown & Brown, L.L.P., "that those investments that produce current income should be held in a tax-deferred account and those that can produce deferred income, such as growth stocks, should be held in taxable accounts."