If you’re just starting out, it’s pretty easy to find the boilerplate beginning investment advice:
- Contribute to your 401(k) up to your employer match.
- Open up a Traditional or Roth IRA for additional savings.
- Invest in low-cost index funds to give yourself the best chance at maximizing your investment returns.
It’s all great advice, and that’s definitely the way to start.
But what if you’re already doing those things? What’s the next step for someone who wants to go further?
Here are 5 advanced investment strategies for people who already have the basics in place and want to take things to the next level
1. Maximize Your Savings
Okay, this one isn’t so advanced. But it’s important so it’s going first.
For the first 10-15 years of your investment life the amount you save is far more important than the return you earn. So before doing anything else, make sure you’re not just contributing, but taking full advantage of the savings opportunities available to you.
For 2015 you’re allowed to contribute up to $18,000 to a 401(k) or 403(b) and $5,500 to an IRA. Those numbers bump up to $24,000 and $6,500 if you’re age 50 or over.
Maximizing those savings opportunities will do more than anything else to put you ahead.
2. Take Advantage of a Health Savings Account
This is one of those really cool opportunities that not many people know about.
If you have a qualifying high-deductible health insurance plan, which for 2015 means a deductible of at least $1,250 for individual plans or $2,500 for family plans, you have the option of opening a health savings account.
Technically these accounts are designed to make it easier to afford out-of-pocket medical expenses, but they have a few characteristics that can make them fantastic retirement accounts as well.
- The money rolls over from year to year. This is in contrast to the “use it or lose it” plans you may have through your employer.
- Contributions are tax-deductible (like a 401(k) or Traditional IRA).
- Money grows tax-free while inside the account (like all retirement accounts).
- The money can be withdrawn tax-free for medical expenses at any time.
What those last three points really mean is that it’s the ONLY account that offers a potential TRIPLE tax break. You can’t get that with a 401(k), IRA, or anywhere else.
If you have the opportunity to use a health savings account, it can be a great way to turbocharge your retirement savings.
3. Got a Side Gig? Open Your Own Retirement Account
If you freelance, have a side gig, or if you’re full-time self-employed, you can open your own retirement account specifically for that business income so that you can save even more money.
As long as you don’t have employees, the three main options are:
- SEP IRA – This one is popular because it’s so simple. You can contribute up to 25% of your net business income per year.
- Solo 401(k) – There’s a little more administrative work here, but the added flexibility can be worth it. You’re allowed to contribute up to 25% of your net business income per year PLUS up to $18,000 as an “employee” contribution.
- SIMPLE IRA – Easy to set up and you can contribute up to $13,500 per year.
Here’s a good resource explaining these three options in more detail: SEP vs. SIMPLE vs. Solo 401(k).
If you do have employees, I would recommend talking to a specialist about your options, as the rules and choices get more complicated.
4. Open a regular old brokerage account
If you’ve exhausted all your tax-advantaged space within retirement accounts, you can open a regular old brokerage account to squirrel away some more money.
These accounts are a lot like IRAs in that you open them on your own and you have complete flexibility to choose your own investments. The big difference is simply that you don’t get any tax breaks, which means you should be a little more thoughtful about which investments you put inside these accounts (see tip #5).
A brokerage account is great not only for extra savings, but for money you may want to access sooner than you could with a retirement account. There are no rules about when you’re allowed to withdraw from these accounts, though you will have to take taxes into consideration.
5. Invest Tax Efficiently
Once you venture into the world of taxable brokerage accounts, you’ll want to do what you can to minimize your tax costs while still sticking to your overall investment strategy.
The specifics of how to do this will vary based on your personal tax situation and investment options, but in general you can categorize your investments in one of two ways:
- Tax efficient – These are investments that include natural tax-deferral. Stock index funds are a good example because capital gains are primarily only recognized when you decide to sell the fund, and can therefore be delayed for years on end.
- Tax inefficient – Investments that recognize income every year are tax inefficient. This includes many bond funds, REITs, and actively managed stock funds with lots of internal trading.
In general you want to put tax inefficient investments into retirement accounts like a 401(k) or IRA so that you aren’t weighed down by annual tax costs. Tax efficient investments can then be put into taxable accounts.
Although it can be a little confusing to sort out, the results can be well worth the effort. Here’s a good overview on how to do this: Principles of tax-efficient fund placement.
Remember, handling the basics like maximizing your 401(k) and IRA and investing in low-cost index funds will do more than anything else to put you on the right track.
But if you’re looking to take the next step and really optimize your investments, these five tips will help you do it.
Personal Loans AD
5.99% To 35.99% APR
6.99% To 14.99% APR
Marcus by Goldman Sachs®
6.99% To 24.99% APR
3.34% To 16.99% APR
By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.