The 2003 Tax Relief Act passed in May will prompt many investors to rethink how they invest. The law sharply reduces taxes on investment income from capital gains and dividends. Dividend income that was previously taxed at your regular tax rate (as high as 35 percent) is now taxed at a top rate of 15 percent. Capital gains taxes have been reduced from 20 percent to 15 percent for most investors.

With these rule changes, a fundamental question comes to mind. That is, does it still make sense to invest your money in tax-deferred accounts such as IRAs and 401(k) retirement accounts? Remember that these accounts allow you to defer paying taxes on investment income as long as you don’t withdraw the money until you reach retirement age. For some investors, the benefit of tax deferral may no longer outweigh the higher tax rates they could face when they withdraw the money at retirement.

Consider, too, the types of assets in which you’ll be investing. For example, interest from money market accounts, CDs and bonds is still taxed at your regular tax rate. Since interest rates are at their lowest in decades, you won’t get much of a return, especially after Uncle Sam takes his cut. These investments may still work well inside a retirement account. You won’t pay high taxes on the interest currently, and, when you withdraw the funds at retirement, you may be in a lower tax bracket so the tax bite won’t be so bad.

Stocks may work better outside of a retirement account. As long as you hold on to them for more than a year, you’ll benefit from the new low capital gains rates. Dividend-paying stocks also make sense outside of retirement accounts. Remember, though, if you trade stocks on a short-term basis, you’ll pay taxes at your regular tax rate which could be more than double the long-term capital gains rate. You’ll be better off doing these trades inside a retirement account.

Clearly, the new law will affect investment strategies in a major way.

Bertrand Labonte is an accountant with Ouellette, Labonte, Roberge & Allen Professional Association.