When you maximize the tax-deferral opportunities in your investment programs, you generally put more money at work for you and can accumulate money for savings and retirement more efficiently. After annual IRA and 401(k) contribution limits are reached, some additional opportunities for tax-deferred investment remain available. A diversified investment approach using creative strategies might provide more liquidity and security.
Deferred annuities provide an additional opportunity for tax-deferred investment returns. They are investment contracts issued by insurance companies in which you make periodic contributions and gain access to a number of investment choices. Fixed deferred annuities provide a guaranteed investment return for a specified period of time. Variable deferred annuities provide access to sub-accounts for which performance is tied to various stock, bond and money markets. Investment earnings are not taxable until you make withdrawals, and any withdrawals before age 59 1/2 incur an additional penalty tax of 10 percent.
Variable Life Insurance
Variable life insurance is an insurance contract in which your premiums are invested in a variety of stock and bond instruments. Deductions are made from your investment component for the cost of the insurance amount as well as for monthly administration fees. Investment earnings accumulate tax free as long as the policy's cash value does not exceed the single premium required to pay for the death benefit at any attained age. During retirement, you can access your cash value by taking out tax free collateral loans and using the policy proceeds to repay the loan at death. Any remaining life insurance proceeds pass on to your named beneficiary at death.
Mutual funds are investment contracts that allow you to pool your money with other investors and benefit from the performance of professionally managed equity, bond and money market funds. The wide choices of investment options allow you to create a portfolio that does not exceed the amount of risk you are willing to take. Typically, taxable income is generated when stocks and bonds are bought and sold inside the funds, triggering capital gains that are usually taxed at lower rates than for ordinary income.
Certificates of Deposit
When you wish to add a measure of security and guaranteed income to your investments, consider investing some of your money in certificates of deposit. CDs provide a guaranteed rate of return for a set period of time, and a creative strategy called laddering can provide liquidity and keep your money free to take advantage of rising interest rates. The strategy is quite simple: instead of investing all your money in CDs that mature in five years, put one-fifth of your money in one CD each with one-, two-, three-, four-, and five-year terms. Starting with the following year, place your renewing CD in a five-year CD. You will now have one CD maturing every year and have access to some of your money on a regular basis and not have everything tied up for a number of years.
- CNN Money: Ultimate Guide to Retirement - What is an IRA?
- CNN Money: Ultimate Guide to Retirement: Why is a 401(k) such a good deal?
- CNN Money: Ultimate Guide to Retirement: What is an annuity?
- Financial Web: Variable Life Insurance Policy: Understanding the Fine Print
- SEC: An Introduction to Mutual Funds
- Bankrate.com: Certificate of deposit investing strategies
- Jupiterimages/Comstock/Getty Images