Make the Most of Tax-Sheltered Accounts
Keep these three key things in mind to maximize investment tax breaks, says Christine Benz.
Note: This video is part of Morningstar's Tax Relief Week special report.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
The government gives us tax breaks for investing for certain goals, such as retirement or college. But it's hard to even know which wrapper to use.
The short answer is, you'll probably need more than one of these accounts over your lifetime. Even if you're saving for a single goal--retirement--investing in just a 401(k) or just an IRA probably isn't going to be enough.
Another key thing to bear in mind is that in exchange for the tax breaks, nearly all of these vehicles have restrictions on how long you have to keep your money in. So plan to have a nice long holding period. One notable exception is a Roth IRA, where you're allowed to withdraw your contributions, but not your investment gains, on a tax-free basis at any time and for any reason.
The last tip related to tax-advantaged accounts is to take advantage of the ability for your investments to grow in value without owing taxes on them on a year-to-year basis. If you have investments that kick off a lot of taxable income--such as high-yielding bonds or stocks--a tax-sheltered account is a great place to put them.
Thanks for watching. I’m Christine Benz for Morningstar.com.