Beyond 401(k) and IRA

You're contributing as much as you're allowed to a 401(k) or other employer-sponsored retirement plan. You're also contributing the maximum annual amount to your Roth or traditional IRA. But you want to set aside still more money to make sure your retirement is everything you hoped for. What options do you have? Here are some things to consider...

Before moving beyond - are you really maxing our your 401(k) and IRA?

IRAs and employer-sponsored retirement plans like 401(k)s have some real advantages when it comes to saving for your retirement. So, before you go any further, make sure you're really contributing all you can.

In 2008, most individuals can contribute up to $15,500 to a 401(k) plan, and up to $5,000 to a traditional or Roth IRA. If you're age 50 or better, though, you can make up to an additional $5,000 in "catch-up" contributions to your 401(k) in 2008, and an additional $1,000 to your traditional or Roth IRA. What's more, if you file a joint tax return with your spouse, your spouse may be able to make a full IRA contribution, even if he or she has little or no taxable compensation. (Call my office if you need help with the details on this one.)

Looking at deferred annuities

If you are looking beyond 401(k)s and IRAs, one option you may be aware of is a deferred annuity. Deferred annuities are generally funded with after-tax dollars, but earnings are tax-deferred; you don't pay tax until you take a distribution from the annuity, and then you only pay tax on the portion of each distribution that represents earnings. There is also no annual limit on contributions to an annuity.

The tax deferral offered by a deferred annuity is a nice feature, but it comes with some tradeoffs that you'll need to weigh carefully:

• There are associated fees and costs, including annual fees, investment management fees, and insurance expenses
• A surrender charge may be imposed if you withdraw funds within a certain period of time (generally 7 years!)
• A 10% federal penalty tax (in addition to any regular income tax) may apply if you withdraw funds from an annuity before age 59 1/2
• Investment gains are taxed at ordinary income tax rates, not at the lower capital gains tax rates

Annuities do have some unique benefits beyond tax deferral. With annuities, you can elect an annual payment amount that is guaranteed for the rest of your life (the guarantee is subject to the payment ability of the issuing institution) - this relative degree of certainty can be psychologically and financially comforting. In addition, annuities may offer some creditor protection under state law.

Taxable investment accounts

Your other basic option is to invest through a taxable investment account. The lower federal income tax rates that apply to long-term capital gains and qualifying dividends go a long way toward taking the bite out of holding investments outside of a tax-advantaged retirement account like a 401(k) or IRA. And, a taxable investment account offers one enormous advantage: You gain a tremendous amount of flexibility. You can choose from a virtually unlimited selection of specific investments, and there's no federal penalty for withdrawing funds before age 59 1/2.

Investment options worth mentioning:

• Mutual funds or separately managed accounts (SMAs) managed for tax efficiency intentionally minimize current taxable distributions
• Indexed mutual funds and exchange-traded funds (ETFs) trade infrequently and therefore tend to have low annual taxable distributions
• Tax-free municipal bonds and municipal bond funds generate income that is free from federal and/or state income tax

Always keep the big picture in mind

Your investment decisions should be based on your individual goals, time frame, risk tolerance, and investment knowledge. You should evaluate every investment decision with an eye toward how the investment will fit into your overall investment portfolio, and whether it will meet your general asset allocation needs. A financial professional can be invaluable in helping you evaluate your options.