Five 401(k) Plan Investing Rules to Use Now


Here are five important rules that I use to implement my 401(k) plan investment choices:

1. Allocate your fixed income and other highly taxable investments to your 401(k) plan. Other highly taxable assets include real estate investment trusts (or REITs), whose dividends are taxed as ordinary income, and commodity funds. Nearly any fund with high turnover of holdings should be in your retirement plan account. If your fixed income investments are in your taxable account, then you are most likely paying taxes on the income at your full tax rate.

2. Place your stock portfolio with lower turnover in your taxable brokerage account. The federal government taxes stocks’ dividends at a low 0.25 percent rate and capital gains on stocks held for one year at 25 percent.

3. All things being equal, choose low-cost exchange-traded funds (ETFs) in your 401(k) plan. Mutual funds offered in company retirement plans generally have high fees and often charge higher fees than you would pay if you bought the funds directly. Most mutual funds do not have the returns to justify their high expenses. The high fees embedded in the funds help pay the company or administrator for their efforts at your expense.

4. Maximize your 401(k) plan contribution so you can reap the benefits of a company match. It is a company benefit, and you need to take advantage of it.

5. Keep short-term safe investments in your taxable brokerage account. Most 401(k) plans include a default investment, which is a low-yielding safe vehicle along the lines of a money market fund. Your 401(k) plan should be for long-term investments.

Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.

Susan Carr-Templeton

About Susan Carr-Templeton

Susan Templeton is the founder of Stafford Wells Advisors, a wealth management firm serving individuals, families and businesses and advising workplace retirement plans. Stafford Wells was founded in 2008 with the mission of delivering independent, complete, unbiased investment and planning advice, free of any conflicts of interest. Susan Templeton has more than 20 years experience in investment management. She received her B.S.B.A. degree in marketing from the University of Denver and her M.B.A. from the University of Chicago. Susan is a trustee for the Advocate Foundation where she chair’s the Planned Giving Committee and is a member of the Investment Committee. Susan serves on the investment committee for the Visiting Nurse Association (Chicago) and is a former trustee of the Village of Oak Brook Police Pension Plan.