Tax-favored retirement investment vehicles, such as individual retirement accounts and 401(k) plans, offer an attractive way to accumulate funds long term for your future. Are you taking full advantage of what they have to offer? These tips may help you make the most of your retirement accounts:
• Contribute the maximum. IRAs and 401(k) plans let you defer taxes on investment earnings until you receive them, presumably in retirement. (Roth IRA withdrawals generally are free from federal income taxes if certain condition are met.) The tax advantages of these accounts may offer you greater accumulation potential than similar taxable investments. As an added bonus, your contributions may generate current tax benefits: Pretax 401(k) contributions reduce your current tax liability dollar for dollar, and your traditional IRA contributions may be tax-deductible. (Roth IRA contributions are not deductible.)
Please remember that withdrawals from a Roth IRA may be subject to state and local income taxes, and withdrawals before five years from the initial investment may be subject to federal income taxes. Withdrawals from a qualified retirement plan or traditional IRA generally are subject to ordinary income taxes. Withdrawals from a qualified retirement plan, traditional IRA and Roth IRA prior to age 59½ may be subject to a 10 percent federal tax penalty. Certain exceptions apply.
• Just say “rollover.” You may be eligible to receive a lump-sum distribution from a qualified retirement plan if you retire, change jobs or the firm terminates its plan. If so, consider electing a direct rollover of the funds to an IRA (or to your new employer’s qualified retirement plan.) A direct rollover lets your retirement savings continue to grow tax-deferred until withdrawal. Even if you are retiring, you may not need the entire balance at once. With a rollover, you can spread out the distributions — and the tax liability — through your retirement years.
• Invest according to your objectives. Most 401(k) plans offer a variety of investment choices to suit a range of objectives, and you may invest IRA assets in virtually an investment. What’s more, you may adjust your investment allocation in tax-deferred accounts without current tax implications. Your Waddell & Reed financial advisor can help you determine an investment mix with a comfortable balance of risk and return potential. Contact him or her today to learn more about how to make the most of your retirement assets.
Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus containing this and other information for the mutual funds offered, call your financial advisor or visit us online. Please read the prospectus carefully before investing. Please note that mutual funds will fluctuate in value and an investor can lose money by investing in mutual funds.
Information provided by Chad W. Hansen, Waddell & Reed Financial Advisor, 4201 Westown Parkway, Suite 330 West Des Moines, 515-278-2347.