Saving outside your plan
Your employer’s plan is not the only way you can save and receive tax benefits. You have several investment options:
- Individual Retirement Accounts
- Mutual funds
- Tax-exempt bond funds
- Variable annuities
- Education savings programs
Like your employer’s retirement plan, IRAs allow you to invest money for retirement while providing tax benefits as well. You can invest up to $5,500 in 2018 — and even more if you’re 50 or older.
There are two kinds of IRAs to consider — Traditional and Roth.
You may qualify for a tax deduction on your traditional IRA if you meet the following criteria: Your household income must be less than $73,000 in 2018 for single tax filers or $121,000 in 2018 for joint tax filers.
Contact your financial professional or visit americanfunds.com for more information about IRAs.
Investing in mutual funds outside of your retirement plan can provide another tax-friendly saving opportunity. While your savings do not grow tax-deferred as they would in a Traditional IRA or 401(k) plan, current tax rates on qualified dividends and long-term capital gains can be considered favorable when compared with regular income tax rates.
- The top tax rate on qualified dividends is 20%*.
- The top tax rate on long-term capital gains is 20%*.
*This rate does not include the 3.8% Medicare surtax applicable to net investment income for higher income taxpayers.
These mutual funds typically invest in bonds issued by state and local governments to finance projects such as highways, schools, hospitals and airports.
- Dividends paid by these funds are exempt from regular federal income taxes.
- State-specific tax-exempt funds can offer both federal and state tax advantages.
- The higher your tax bracket, the more benefit there is to investing in tax-exempt bond funds.
Click here for information on American Funds tax-exempt bond funds. Your financial professional can help you select from these or other tax-exempt funds that may be right for you.
A variable annuity is an investment that includes an option that can help make sure you don’t outlive your assets.
- Taxes aren’t due until earnings are withdrawn. (Note that you may have to pay a 10% federal penalty tax on earnings withdrawn before age 59-1/2. Surrender charges and other costs may apply.)
- Your money is invested in professionally managed funds that are similar to mutual funds.
- Returns fluctuate as the prices of the stocks and bonds in the funds rise and fall, so the returns are variable.
- They typically include a death benefit that can provide some protection to your beneficiaries.
If you’d like to put money away for college tuition or other education expenses and receive certain tax benefits, consider these three options:
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional or downloaded and should be read carefully before investing.