Once you’ve exhausted your traditional retirement funds, including 401K, 403B, traditional IRAs, Roth IRAs and other types of defined contribution plans, you may be asking, what’s next? I always recommend utilizing non-retirement funds, such as after tax money, to invest in index funds, including ETFs and mutual funds, in conjunction with traditional retirement funds. Here’s why:
- There are no contribution limits
- No penalties for pulling out money prior to age 59.5
- There is potential for significant investment growth
There’s a lot of potential for maximizing savings with non-retirement funds, but there are also some common pitfalls to watch out for. In this blog, we’ll take a closer look at investing with non-retirement funds as I share my top five rules for investing with them.
Rule 1: Make sure you’re getting your retirement fund advantages
My first rule for investing with non-retirement funds is to max out all of your retirement funds before you start. It’s very important to take advantage of the benefits of a 401K, for example. If your company is matching, that’s essentially free money. Max out any amount you invest in our 401K to get the most out of the company match. Plus, a Roth IRA will grow tax-free for as long as you leave it. These are advantages you don’t want to overlook.
Rule 2: Think of life insurance as an investment
I always advise my clients to think of life insurance as an investment. If you have children living at home, a large mortgage on your home or if you are still working, life insurance is a must. Many clients are skeptical of life insurance, or hesitant to contribute toward a plan. When you remind yourself that life insurance is an investment in your family’s future, paying toward it becomes a lot easier.
Rule No. 3: Hold onto your investments for more than a year
When you’re investing with after tax funds you get a tax advantage in the form of capital gains tax. If you buy a stock and hold it for over a year you get long term capital gains rates. But if you sell it the next day, that income would fall under normal tax rate. This could mean a difference of tens of thousands of dollars.
For example, a married couple filing jointly who make between $80,000 and $501,000 in 2021 will have a long-term capital gains rate of 15%. If the couple makes at the higher end of that range, they will get put into a 35% normal tax bracket. The difference between paying a 35% tax rate and a 15% tax rate is worth waiting a year for.
Rule No. 4: Think of capital loss as a bank
Let’s say the stock or ETF you buy goes down, and you sell it and incur a big loss. With that loss, you can write off $3000 per year on your tax return as a loss. Depending on how big the loss is, you may think you’re going to have to write off $3,000 on your tax return forever. However, if you have another stock that is highly appreciated, you may be able to sell that and use the capital loss to offset this gain. Then, you can re-buy your highly appreciated stock and just increase your basis. (There are a few wash sale rules to look out for in this situation, such as waiting at least 30 days to rebuy the stock.)
When I advise my clients about this I call it a “capital loss bank.” Essentially, you are using your loss as a bank. It’s not a true financial term but it’s a huge deal especially if you have stocks or ETFs that went down and others that have appreciated.
Rule No. 5: Look for a low turnover
Mutual funds that are invested in with after tax money must pass through profits to investors and shareholders at the end of the year. You have no idea what the results of this process are until you see the distribution in your account, which makes tax planning a challenge. That’s why it’s beneficial to look at mutual or index funds with a low turnover, which means they aren’t selling a lot of equities in the fund, and less people have to look over it in December. This will ensure you get the best rate of return. Search for mutual funds without a lot of turnover that are geared toward after tax investing on Morningstar or ask us about the right types of mutual funds for you.
Rule No. 6: Just keep saving
The people who have the best retirements aren’t necessarily the former CEOs or the flashy millionaires who come in. Time and time again, I see the best retirement being enjoyed by those who were committed, savvy savers during their working years.
Call us at 888-500-5830 or contact us through email, and we’d be happy to dive into your portfolio and give you the best investing advice customized just for you.
By Tyler Lively