Don’t view your 401(k) investments in isolation, without considering your other investments. To help maximize your investment results, first make overall decisions for your entire portfolio, then determine how your 401(k) investments fit into that plan.
Some items to consider include:
• Consider the tax consequences before making 401(k) investments. Earnings on investments inside your 401(k) plan are tax deferred until withdrawn, with capital gains taxed at ordinary income tax rates rather than capital gains tax rates. Therefore, you should carefully evaluate which types of investments to hold in your 401(k) plan. Municipal bonds, whose interest income is usually exempt from federal and sometimes state and local income taxes, and Treasury securities, whose interest income is exempt from state and local income taxes, should be held outside your 401(k) plan.
• Review your 401(k) investments, selecting the strongest alternatives. Since you typically have limited choices in your 401(k) plan, select the most attractive investments from those alternatives. You can then fill in other categories in your asset allocation with investments outside your 401(k) plan.
• Invest in your employer’s stock with care. You already rely to a significant degree on your employer for your livelihood. Remember the importance of diversification when investing – avoid investing too heavily in your company’s stock.
Make sure to coordinate your 401(k) investments with your total investment portfolio.
For more information contact Lance Drummond at [email protected].
Copyright BizActions 2011.