What other options are out there for retirement investing?
We are married DINKS. We both max out our 401Ks and Traditional IRAs. We are not eligible for Roth IRAs. We still would like to save more for retirement. What’s the best choice out there? Are there other tax deferred tools we should be using?
Veronica
{ 4 comments… read them below or add one }
Lydia
Been there.
First question: Are you going to be DINKS forever? Will you ever have kids? Plan to retire early? Want to spend a bunch of money at any time in your pre-retirement years?
If you’re going to need (or want) the money, ensure that you’re keeping enough in (relatively) easy to access ways. For example, if you plan to take a cruise in 5 years, make sure that the money will be there (in a CD, money market, or low-risk investment). If you’re going to have kids, make sure you have money stashed to move into college funds, when the time is right. If you want to retire early, you’ll need money outside the 401(k)/IRA.
In general, if you’re looking to best your tax situation, pick investments that don’t pay dividends or realize gains until YOU sell. For example, buying stock in a company that doesn’t pay dividends, and then holding for 30+ years (until you retire) is a good way to postpone having to pay the taxes. Of course, if (when you eventually sell) LT capital gains is the same as what it’d be now, it doesn’t really help you.
Real estate is often cited. With such a long horizon, you can afford to wait out market fluctuations. Just pick a type of real estate that works with your lifestyle (e.g., don’t buy a rental house unless you plan on actively managing it or paying someone to do it for you).
Personally, I have kids. So, I’ve maxed out my 401(k) and IRA. Now I’ve moved onto saving for the kid’s college. The rest of the money is in an emergency fund (makes virtually nothing), a variety of mutual funds (with varying tax profiles), and stocks. My house isn’t really an investment, but I’m not shy about putting money into it, in an intelligent way.
Jean
1. Spend some of your money now before you’re too old to enjoy it! Are you being too frugal and not enjoying life now? Other than that I would:
1. Have 6 months worth of expenses in a money market fund earning 5% at least. This money can also be used for any irregular expenses (vacations, remodling, whatever).
2. Give away some money. Either accumulate it to one day start a foundation with, give 10% of your income per month to a church or organization you support, or spend some money to travel abroad to do volunteer work for 1-2 weeks per year (great way to see the world, help others, and deduct your vacation costs from your taxes!).
3. Start investing in regular old taxable accounts. Not as many tax advantages, but it’s still great to pile up some money.
Nathaniel
consider choosing tax-exempt municipal money market and bond funds for your taxable accounts.
Interest, or income dividends, paid on bonds issued by a state or local political subdivision (that is, municipal bonds) is generally exempt from federal income tax. The interest may also be exempt from state and local income taxes, provided the bonds were issued in the state in which you reside.
Because the income dividends from municipal money market and bond funds generally aren’t federally taxable, these funds typically have lower yields than taxable money market and bond funds. Even so, if you’re in one of the upper marginal tax brackets—and especially if you live in a state or locality that has high income tax rates—municipal money market and bond funds are likely to provide you with higher after-tax income than would taxable funds with similar characteristics.
Although the income from a municipal bond fund is exempt from federal tax, you will pay tax on capital gains realized from a fund’s trading or from the redemption of shares. For some investors, a portion of the fund’s income may be subject to the alternative minimum tax. Income may also be taxed by state and local governments.
Deferred annuities help you save for retirement during your working years by letting you defer taxes on your investment gains. Investors who purchase deferred annuities usually have invested as much as they can in IRAs and employer-sponsored plans and are looking for other tax-deferred investment options. Therefore, they’re typically used by investors with significant assets to invest.
You can purchase a deferred annuity with a single payment or with periodic payments made over time. Deferred annuities also give you the opportunity to convert your savings into an income stream at some point in the future—usually at retirement. They may be appropriate if you:
Are still saving for retirement.
Expect to be able to set aside significant assets over the next five years or longer.
Have “maxed out” on other tax-deferred savings options.
Want the advantage of tax deferral.
Are considering converting your assets to an income stream in the future.
Note that annuity distributions, like 401(k) and IRA distributions, are subject to ordinary income tax, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
Kathy
What can you do to become self employed? Sep IRAs have different rules.
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