Retirement Accounts: How To Maximize

When you choose investments for the retirement plans you control, don't just look at those investments in a vacuum: consider your retirement savings and other investments together. Make sure that both groups of investments are well diversified within themselves and when looked at as a whole.

In determining which investments to use: consider whether you might need to access your money prior to retirement because of disability or other emergency needs. If so, you'll want investments that are easily converted into cash, preferably without penalty. At the same time, use investments that make the most of your plan's tax-savings features.

Here are some dos and don'ts on ways about investing your retirement funds:

• Don't place tax-exempt investments, such as tax-exempt municipal bonds or special tax-deferred money market funds, inside tax-deferred retirement vehicles. The investments will not only lose their tax-exempt status upon distribution, but will also have a rate of return that is lower than that of an equivalent taxable investment. If, upon distribution, you're going to pay tax on either investment, it makes sense to choose investments that will grow more quickly and earn more.
• Don't place tax-sheltered annuities inside of retirement vehicles. The only benefit to placing a tax-deferred investment inside a tax-deferred retirement vehicle is for the annuity salesperson that receives a commission. You might, however, consider a tax-sheltered annuity for retirement savings outside of or in addition to your other retirement plans.
• Do consider the time frame for which you are investing, as you should with any investment. Are you retiring in five years or in thirty? Might you need to access the funds in two years due to disability? Visit our Investments information for more information about investing for a particular time frame.
• Do consider putting equities that tend to generate income inside of your retirement plans as long as you don't need that income to pay your expenses. You won't have to pay tax on the interest or dividends as they are earned. The interest and dividends can be used to purchase additional investments that will in turn generate more growth.
• Do think about putting a greater proportion of assets that increase in value but don't pay dividends (such as "small-cap" stocks) outside your retirement plan. Since you won't have to pay much tax on these assets until you sell them, the increase in their value will be taxed at the capital gains rate instead of the ordinary income rate. For most people, capital gains rates are lower than income tax rates.
• Don't put investments whose value fluctuates a lot over the short-term into your retirement plan if you believe there's a good chance that you'll need to access a large part of your funds within a few years due to disability or some other emergency. The value of the investments may be at the bottom of a downswing when you need the funds and you won't have the time to wait for it go back up before cashing-in the investment.

If you have a large, self-managed retirement account, such as a 401K or IRA, consider consulting a professional for advice in investing your retirement plan funds.

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