young woman earning $35,000 a year recently began receiving a large annual stipend from her trust fund - about $200,000. "Lucky her," you're probably thinking.

But a big pile of money brings its own concerns. The hefty dose of cash generates a ton of taxes. And that is what this young woman has focused on recently. For example, she first wondered whether she should quit her job to save money on taxes. Her next question concerned real estate. Her home was paid off. Should she buy a second home, so she could get a deduction for mortgage interest?

Well, of course, the answers are "no" and "no." Never let the tax tail wag the dog. Still, taxes should be a consideration for all of us. Although they should never determine your goals, taxes can make a great deal of difference in how much money you have at the margin.

A friend of hers set up taxable and tax-deferred portfolios only to discover too late that the way he divvied up the assets between the two was absolutely backward. He'd put those assets throwing off the most taxable gains in his taxable accounts. And the tax-efficient index funds? He'd put them in his tax-deferred account.

The moral here is to understand the impact of taxes on your investments. The 1997 Taxpayer Relief Act made some interesting changes in the traditional advice of being a tax-wise investor. Here is a new list of priorities for the years to come:

Start with your 401(k) plan. This provides you with several advantages. You subtract your contribution from your taxable income, saving money on this year's tax bill. Chances are good you'll get an employer match. And the money grows in the account tax-deferred until you take it out. This is a top priority.

Next, put pre-tax money in dependent care and medical reimbursement accounts. These are accounts that allow you to pay for care for children or elderly parents with pre-tax money and to pay for unreimbursed medical expenses with pre-tax dollars. Studies show that use of these accounts is low. That's too bad because there are real savings to be claimed here.

This is a brand-new player this year and it's moved right up to second place. Although there is no tax deduction for money contributed to a Roth Individual Retirement Account, withdrawals from the account are completely tax-free.

There are a number of advantages to the Roth. But it is the ability to let the money continue to grow tax-exempt that represents the biggest advantage. The more time you have, the bigger the advantage. But experts say the advantage still holds for 65-year-olds and even 70-year-olds. That's chiefly because there is no mandatory withdrawal schedule.

With traditional retirement accounts, you must begin withdrawing money the year after you turn 70╜. But with the Roth, you can continue to allow it to grow without a bite for taxes. Other advantages are no 10 percent penalty on early withdrawals before age 59╜, provided you withdraw contributions, not earnings. You also can continue to contribute as long as you're working, unlike the traditional IRA, which does not permit contributions after age 70╜.

OK, I'm not going to advise you to buy a home just for tax purposes. But there are some big advantages. The interest you pay on a home mortgage is tax deductible. If you're going to stay in that home for five years or longer, you'll probably come out ahead purchasing your home and then reselling it rather than just renting. Better yet, the profits you make on a home are tax-free, up to $500,000.

Start by figuring out what investments you will own in your overall portfolio. Then divvy them up between your taxable and tax-deferred accounts.

If you plan to own actively managed mutual funds that invest in the stock market, they should go in your tax-deferred accounts. Mutual funds that are actively traded generate short-term capital gains that are taxed at the same rate as ordinary income, which is as high as 39.6 percent. If you hold them in your taxable account, you're stuck.

If you want to own zero-coupon bonds or any type of security that is issued at a discount and appreciates to face value over time, that goes in your tax-deferred account. These investments carry a taxable "phantom income," which is the imputed annual income on which you must pay tax even though you don't actually receive the money.

The new tax law lowered the capital gains rate to 20 percent for assets held for more than 18 months. That makes a good argument for putting stocks in a taxable account unless they have high dividends. Dividends are taxed as regular income - up to 39.6 percent.

So high-growth companies that plow earnings back into the company rather than paying them out as dividends make good sense. So do tax-efficient investments like index funds or spiders, which are an index-like instrument that trades on the American Stock Exchange. Think carefully about the tax implications of each asset class you choose.

Since municipal bonds are tax-free, they offer only a modest return on your investment. The payback comes only if you're in a higher tax bracket. You can compare the yields between taxable bonds issued by corporations and municipal bonds like this: Take 1 minus your tax rate divided by the rate available on municipal bonds. The answer equals the rate you must get on a taxable bond to beat the muni rate.

Let's say you can earn 5 percent on a municipal bond and you're in the 28 percent tax bracket. One minus 0.28 equals 0.72. Divide 5 by 0.72 and you see that you must get 6.94 percent in taxable yield to equal the 5 percent nontaxable yield.

These two choices have lost much of their appeal with the new tax law. Let's take the nondeductible IRA first because it's slightly better. You're allowed to contribute $2,000 in after-tax money to an account where it will grow tax-deferred until you take it out. At that time it's taxed as regular income.

But the new tax law provides for a capital gains rate of 20 percent for investments held longer than 18 months. So chances are excellent that you'll be paying taxes at a higher rate on your tax-deferred savings than if you had simply used a taxable account using the Roth, which is tax-free. (Of course, if your income level exceeds the Roth's limitations, then this option does give you the advantage of allowing your investments to accumulate tax-deferred.)

Annuities have an added problem: high expenses often coupled with surrender fees. Several annuity providers have recognized this problem and have begun lowering the fee structures significantly, however.

The bottom line? Taxes shouldn't drive investment decisions. But they shouldn't be ignored either. A tax-savvy strategy can make a huge difference in how much money you keep.