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How to Invest Wisely for Retirement
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Take Advantage of Tax-Advantaged Investments
401(k) plans, 403(b) plans, Keoghs, IRAs, and SEP-IRAs allow you to defer income tax on money you put aside for retirement. In addition to investing money that would otherwise be subject to income tax, your nest egg grows tax-free until withdrawal (after age 59 ½ without penalty). Some employers will match some or all of your contributions into these plans.
It is a good idea to invest in these tax-deferred savings plans. However, consider adding other non-tax-deferred investments to your mix as there are a few downsides to tax-deferred plans:
- Withdrawals from these plans are taxed as ordinary income – not at the lower capital gains rates of Roth IRAs or unsheltered investments.
- Withdrawals from your 401(k) increase your retirement income, which increases the amount of your Social Security check that is taxed.
- If you are currently paying a mortgage, contributing to a retirement plan reduces your income and therefore reduces the value of your mortgage-interest deduction.
 | Why shouldn't I take an early distribution from my retirement funds? |  |
As with all your investments, spread your tax-deferred money across a sensible mix of reasonably conservative investments. It’s especially unwise to invest a major portion of your 401(k) in the stock of a company you work for. If the company does poorly, you could both be out of a job and suffer a hit to your retirement nest egg.
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