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Non-retirement investing: What to invest in

There’s more to investing than setting up retirement accounts. Find out if you’re ready for the next step.

Tags: Investing, Retirement
Published: January 30, 2019

For most people, retirement accounts are where they do the bulk of their investing. While it’s important to take full advantage of them, if you’ve been investing in your retirement plan for several years, it may be time to look at additional options.


Retirement investment accounts: The basics

As a group, retirement accounts are known as “qualified” investments because they are qualified for beneficial tax treatment. Qualified accounts come in many different forms, which are largely dependent on a person’s employment situation. Think 401(k)s, IRAs and 403(b) accounts.

These accounts come with annual contribution limits, and most involve pre-tax income benefits. One reason for their popularity is that many employers match contributions, up to a limit.

However, there’s another reason most people invest primarily through retirement accounts. “Folks are comfortable investing in their 401(k)s or 403(b)s because the funds come out of their paycheck automatically. They don’t really have to think about it,” says Jake Kujala, vice president and group product manager at U.S. Bank Wealth Management. At a certain point, convenience becomes inertia and, as Kujala says, “folks just tend to put off” looking into other investments.

Visual: Are you ready to invest in non-retirement accounts?


The benefits of non-retirement investments

Non-retirement investments come in many varieties. “They’re ‘non-qualified,’ meaning the investor would be investing with after tax dollars,” says Kujala. If you’re maxing out your 401(k) contribution limit and have extra income that you want to invest, that’s where non-qualified accounts may come into play.

A benefit of non-qualified investments is the amount of control you have over them. With employer-sponsored plans, you may be limited by what investments are available to that plan. Non-retirement accounts, on the other hand, allow you to choose your own investments.

Another benefit, according to Kujala, is tax diversification. “Non-qualified accounts allow you to be more strategic about how and when you access your money.” While any earnings are subject to capital gains tax, non-qualified accounts don’t have any restrictions on when you can make withdrawals. Meanwhile, withdrawing money from a retirement account before the age of 59 ½ may incur a tax penalty of 10 percent.

If you know that a life event, such as buying a house, may involve tapping your investments, you could be in a better position with non-retirement investment accounts. Otherwise, you’ll have to wait to draw from your 401(k) or other employer-sponsored plan until you’re much closer to retirement, or you pay the tax penalty.


Popular non-retirement investments

Options abound when it comes to non-retirement investments. A financial professional can help you find the right investment instrument for your goals. Here are some common types:

  • Health Savings Accounts (HSAs): HSAs allow you to pay for qualified medical expenses pre- and post-retirement. The money you invest in an HSA is tax-deferred and it can be used tax-free.
  • 529 plans: Once after-tax dollars are put into this education fund, any gains are tax-deferred and funds can be used tax-free when applied to qualified education costs.
  • Brokerage accounts: You can buy and sell taxable investments –such as stocks, bonds, mutual funds and exchange-traded funds (ETFs) – through a licensed broker or using a self-directed brokerage account. Trades made via a broker generally carry commissions and fees.
  • Automated investment accounts: Run by algorithms that are programmed to make investments for you, with guidelines determined by a questionnaire. Also called robo-advisors, these accounts generally carry fees that are lower than more actively (human) managed funds.
Diversifying investments for your future

Finding the right investments for you

If you’re ready to explore what non-retirement investment accounts might be right for you, a financial professional can work with you to create and tailor a portfolio to help you work towards meeting your needs. You may want to take these aspects into account when determining the right investment for you:

  • Fees: Brokerage accounts and automated investment accounts come with fees that vary based on factors such as the amount of engagement required to open and maintain them. “The more hands-off the investment account, generally speaking, the lower the fees,” says Kujala.
  • Risk tolerance: “Risk tolerance is the ability to handle volatility and not disengage from the investment strategy when the markets fluctuate.” Kujala uses risk tolerance questionnaires and a review of the client’s past investment behavior to identify how comfortable they are with different types of investment and market conditions.
  • Time horizon: Next, Kujala works with clients to determine which investments might help them meet particular short- or long-term financial goals. “The shorter the duration, the less volatile we want the investments to be. The longer the duration, the more ability we have to take some of those risks to potentially yield a higher return on their investment,” he explains.

When it comes to finding the right allocation mix between retirement and non-retirement investments, Kujala says, “We make our decisions client by client. There’s no rule of thumb, but some diversification is key.”


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