For most people, retirement accounts are where they do the bulk of their investing. While it’s important to take full advantage of them, if you’ve been investing in your retirement plan for several years, it may be time to look at additional options.
As a group, retirement accounts are known as “qualified” investments because they are qualified for beneficial tax treatment. Qualified accounts come in many different forms, which are largely dependent on a person’s employment situation. Think 401(k)s, IRAs and 403(b) accounts.
These accounts come with annual contribution limits, and most involve pre-tax income benefits. One reason for their popularity is that many employers match contributions, up to a limit.
However, there’s another reason most people invest primarily through retirement accounts. “Folks are comfortable investing in their 401(k)s or 403(b)s because the funds come out of their paycheck automatically. They don’t really have to think about it,” says Jake Kujala, vice president and group product manager at U.S. Bank Wealth Management. At a certain point, convenience becomes inertia and, as Kujala says, “folks just tend to put off” looking into other investments.
Non-retirement investments come in many varieties. “They’re ‘non-qualified,’ meaning the investor would be investing with after tax dollars,” says Kujala. If you’re maxing out your 401(k) contribution limit and have extra income that you want to invest, that’s where non-qualified accounts may come into play.
A benefit of non-qualified investments is the amount of control you have over them. With employer-sponsored plans, you may be limited by what investments are available to that plan. Non-retirement accounts, on the other hand, allow you to choose your own investments.
Another benefit, according to Kujala, is tax diversification. “Non-qualified accounts allow you to be more strategic about how and when you access your money.” While any earnings are subject to capital gains tax, non-qualified accounts don’t have any restrictions on when you can make withdrawals. Meanwhile, withdrawing money from a retirement account before the age of 59 ½ may incur a tax penalty of 10 percent.
If you know that a life event, such as buying a house, may involve tapping your investments, you could be in a better position with non-retirement investment accounts. Otherwise, you’ll have to wait to draw from your 401(k) or other employer-sponsored plan until you’re much closer to retirement, or you pay the tax penalty.
Options abound when it comes to non-retirement investments. A financial professional can help you find the right investment instrument for your goals. Here are some common types:
If you’re ready to explore what non-retirement investment accounts might be right for you, a financial professional can work with you to create and tailor a portfolio to help you work towards meeting your needs. You may want to take these aspects into account when determining the right investment for you:
When it comes to finding the right allocation mix between retirement and non-retirement investments, Kujala says, “We make our decisions client by client. There’s no rule of thumb, but some diversification is key.”
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