One thing we've learned while reviewing client's 401(k) plans for our MAXadvisor 401(k) Planner service: a lot of 401(k) plans are really lousy. Some offer only expensive or otherwise poor mutual fund options. Other plans lack variety, making it tough to build a well diversified portfolio. What do you do if you need small-cap exposure, but the small-cap choices in your 401(k) are either terrible or non-existent?
A common mistake people make is to balance their 401(k) and to make certain it's diversified among various asset classes," says Gary Schatsky, an attorney, CPA and former chairman of the National Association of Personal Financial Advisors. "It does not need to be balanced. Your investments do."
That means if you have some money to invest outside your 401(k), you can put it to work in the foreign stock fund of your choice and use the money inside your 401(k) plan to get exposure to other asset classes.
Ideally, you can purchase the investments that aren't available in your 401(k) through another kind of tax-deferred account, such as an individual retirement account, to maximize the effect of compounding returns."
And if you decide you need to look outside your 401(k) to build a properly diversified portfolio, a little forethought can save you a bundle in taxes:
One thing to keep in mind when you're looking at your total portfolio is that different kinds of investment returns are taxed at different rates. Interest and short-term capital gains are taxed at rates as high as 35%, depending on an investor's income. But most investors pay 15% on qualified dividends and on long-term capital gains, or the appreciation on an investment held for more than a year.
So it makes sense to put investments that generate the biggest tax bills, such as taxable bond funds or funds that turn over their stock holdings frequently, in tax-deferred accounts.
One thing we've learned while reviewing client's 401(k) plans for our MAXadvisor 401(k) Planner service: a lot of 401(k) plans are really lousy. Some offer only expensive or otherwise poor mutual fund options. Other plans lack variety, making it tough to build a well diversified portfolio. What do you do if you need small-cap exposure, but the small-cap choices in your 401(k) are either terrible or non-existent?
A common mistake people make is to balance their 401(k) and to make certain it's diversified among various asset classes," says Gary Schatsky, an attorney, CPA and former chairman of the National Association of Personal Financial Advisors. "It does not need to be balanced. Your investments do."
That means if you have some money to invest outside your 401(k), you can put it to work in the foreign stock fund of your choice and use the money inside your 401(k) plan to get exposure to other asset classes.
Ideally, you can purchase the investments that aren't available in your 401(k) through another kind of tax-deferred account, such as an individual retirement account, to maximize the effect of compounding returns."
And if you decide you need to look outside your 401(k) to build a properly diversified portfolio, a little forethought can save you a bundle in taxes:
One thing to keep in mind when you're looking at your total portfolio is that different kinds of investment returns are taxed at different rates. Interest and short-term capital gains are taxed at rates as high as 35%, depending on an investor's income. But most investors pay 15% on qualified dividends and on long-term capital gains, or the appreciation on an investment held for more than a year.
So it makes sense to put investments that generate the biggest tax bills, such as taxable bond funds or funds that turn over their stock holdings frequently, in tax-deferred accounts.
LINK
See also: Ask MAX: Should I Invest in a Loaded 401(k)?