Any tax free retirement investments other than 401k, IRA?

Question

I started making the maximum contribution to 401k and IRAs for myself and my wife. I also have 529 plans for my kids. Are there any other ways I can invest and avoid paying taxes along the way? I don't want to invest in non-profits or tax free mutual funds that have a low return. Should I just chose a few large cap companies and buy stock directly from them and then just hold on to them for 20 years or so and take the capital gains hit?

Answer 1

In my opinion, annuities have gotten a bad rap for legitmate reasons: high expenses, low returns and deception among those promoting them. That's not to say SOME annuities aren't a decent choice for SOME people. But probably not you.

Look at tax-managed mutual funds, such as those at Vanguard. Returns are not low. For example, over the last 5 years, their tax-managed smallcap fund has returned 13% per year on average. That's 6% per year better than the S&P 500. Over the long haul, you'll end up much better off with tax-managed funds than any annuity.

Just my 2.5 cents.

Answer 2

Suze Orman is a big proponent of the Roth 401k. She is making the assumption that tax rates will be higher when people are going to retire then they are now. Given the amount of debt that this country is in that's not a bad premise. But you have to listen closely because she advocates contributing hard and early into the AFTER-TAX retirement accounts. That's because your pay and thus your tax rate is low. More likely that your retirement tax rate will be higher. Additionally you'll have tons of time for the compounding to take effect. As you get older the benefit switches...The tax benefit of the 401k becomes more valuable. Also, it's less likely that you will be in a higher tax rate when you retire. As for which is better? Well, I've seen the numbers run both ways and many financial advisors are touting the Roth...but in reality? Barring a huge tax rate increase it's a push. So the best thing to do is to contribute to both. That gives you the greatest flexibility.

Answer 3

You should also consider an Health Savings Account (HSA). Requires you to have a high deductible health insurance plan, but will allow you to sock away some more before tax money (above the line deduction on your 1040) that grows tax free (if you use it for qualified health expenses).

For more info: www.hsabank.com

It is best to hold individual stocks, Exchange Traded Funds (ETFs) or tax efficient index mutual funds in your taxable accounts. The ETFs and index funds will give you more diversification than just buying a few large cap companies. IShares and Vanguard have some great ETFs that you should consider.

For more info: www.ishares.com, www.vanguard.com

Good luck!

Answer 4

There are several, particularly municipal securities. Please note that your 401(k) and traditional IRAs are not tax free; they are tax deferred. That is, you pay taxes on withdrawals as ordinary income. Because it uses post-tax dollars, the Roth IRA does, in fact, grow tax-free.

Assuming you have exhausted all of your tax-qualified options, there are annuities and life insurance. Both have gotten an extremely undeserved bad rap. Either option can be terrible mistake if applied to the wrong individual or situation; but either can also be the absolute best solution for a specific need. See a qualified financial advisor and make certain that your decision is based purely on the mathematics and advantages involved.

Answer 5

This is where a variable annuity might be practical. Check into them.
We all know there are high fees for some of them but after you have put all you can in a 401K and IRA's maybe this is the right place.