Asset Allocation

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Getting Going -- Putting Your Plan in Motion

When saving for retirement, it is a good idea to put as much of your money as possible into "tax-deferred investment vehicles" like a 401(k) plan. With these, the interest you earn goes right back into the account. You don't have to pay tax on it like you would with a standard bank savings account. So, you increase both your investment and your return. (Once you retire, you will be taxed on the money as you withdraw it. But since your overall income will likely be less than it was when you were working, you'll probably be in a lower tax bracket.)

With all this tax deferment going on, it's not surprising that the federal government puts limits on how much money you can invest this way. After all, the government needs to collect taxes in order to pay its bills.

For a 401(k) plan, the 1998 contribution limit is 15% of your salary, or $10,000, whichever is less. Your employer may set further limits, due to regulations governing contributions for all employees. Whatever your limit, if you have contributed the full amount you are to be commended. Now, what more can you do to save for your retirement?

There's always the good old individual retirement account (IRA), to which you can contribute up to $2,000 a year. As an investor in a 401(k), or similar plan, part of your IRA contribution is tax deductible if you earn less than $40,000 (single person) or $60,000 (married couple). If you earn more than that, your IRA contributions are not deductible.

If you do not participate in an employer-sponsored retirement plan like a 401(k), you can deduct your entire IRA contribution. In effect, you can get the same tax-free savings growth that you would get from a 401(k) plan.

If you've contributed all you can to an IRA and are looking for another tax-deferred investment vehicle, you could consider a variable annuity. This is a hybrid life insurance/investment product, in which your insurance premium is applied to investments. Variable annuities should be considered last-choice tax-deferred investment vehicles, for several reasons.

First of all, an annuity is an expensive investment because it charges an annual insurance and mortality fee. As we discussed earlier, any fee you pay on an investment vehicle is a de facto reduction in your return. Additionally, most annuities don't offer very flexible investment options and investors have little ability to switch among investments. Unlike a 401(k), which offers a range of possible investments, an annuity pretty much locks you into a fund choice -- except for the tax advantage, it's like buying into a single mutual fund. But if you're at the stage of considering a variable annuity, you're doing very well in the tax-deferred investing game.