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
- Tax–exempt money market funds
- Variable annuities
- Education savings programs
Individual Retirement Accounts (IRAs)
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 $5,000 for tax year 2009 - and even more if you’re 50 or older.
There are two kinds of IRAs to consider — Traditional and Roth.
| Traditional IRA | Roth IRA |
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You may qualify for a tax deduction on your traditional IRA if you meet the following criteria: Your household income must be less than $65,000 in 2009 for single tax filers or $109,000 in 2009 for joint tax filers.
Contact your financial professional or visit americanfunds.com for more information about IRAs.
Mutual funds
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 15%.
- The top tax rate on long–term capital gains is 15%.
Tax–exempt bond funds
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 representative can help you select from these or other tax–exempt funds that may be right for you.
Tax–exempt money market funds
It’s a good idea to have an emergency fund to cover unexpected bills or expenses. You can use a regular savings account or money market fund, but if you’re trying to save on taxes, you might consider a tax–exempt money market fund. Like a tax–exempt bond fund, these funds invest in municipal securities, which offer income free from federal income tax. Certain other taxes may apply, so it’s important to consult your tax adviser and read the fund prospectuses carefully before investing.
Click here for information on American Funds tax–exempt money market fund.
Variable annuities
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.
Education savings programs
If you’d like to put money away for college tuition or other education expenses and receive certain tax benefits, consider these three options:
| 529 plans | Coverdell Education Savings Accounts | Custodial accounts |
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Return to topInvestors should carefully consider the investment objectives, risks, charges and expenses of the American Funds. This and other important information is contained in each fund’s prospectus and/or summary prospectus, which can be obtained from your plan’s financial professional or downloaded and should be read carefully before investing.