Non-retirement investing: What to invest in (2024)

Retirement investment accounts: the basics

As a group, retirement accounts are known as “qualified” investments because they qualify for beneficial tax treatment:

• Contributions are either pre-tax or tax-deductible
• Earnings are tax-deferred until you take money out of the account

Retirement accounts have annual contribution limits and penalties for early withdrawal, generally before you reach the age of 59½. Qualified accounts includeemployer-sponsored retirement planslike 401(k)s and 403(b)s. Individual retirement accounts (IRAs) are also considered qualified due to the annual contribution limits and preferential tax treatment.

One reason employer-sponsored plans are popular is that many employers match contributions, up to a limit. However, there’s another reason most people invest primarily through retirement accounts.

“Folks are comfortable investing in their 401(k)s or 403(b)s because the funds come out of their paycheck automatically. They don’t really have to think about it,” says Jake Kujala, vice president and group product manager at U.S. Bank Wealth Management. At a certain point, convenience becomes inertia and, as Kujala says, “folks just tend to put off” looking into other investments.

The benefits of non-retirement investments

Non-retirement investments are “non-qualified,” which means you’re investing with after-tax dollars and not subject to special tax treatment. If you’re maxing out your 401(k) contribution and want to keep investing, that’s where non-qualified accounts may come into play.

One benefit of non-qualified investments is the amount of control you have over them. With employer-sponsored plans, you may be limited by what investments are available to that plan. Non-retirement accounts, on the other hand, allow you to choose your own investments.

Another benefit, according to Kujala, is tax diversification. “Non-qualified accounts allow you to be more strategic about how and when you access your money.” Retirement accounts have rules around and penalizations for withdrawing money before you reach a specific age, generally 59 ½. With non-qualified accounts, you can withdraw money at any time, although any earnings are subject to capital gains tax.

Finally, there are no limits on how much money you can contribute each year to non-qualified investment accounts.

Are you ready to invest in non-retirement accounts?

Before considering investing some of your earnings in non-retirement accounts, start by asking yourself these questions.

• Am I taking full advantage of company matches in my retirement account? Many employers will match 401(k) contributions up to a certain percentage.
• Have I invested enough in my retirement accounts to meet my post-retirement goals?
• Do I have three to six months' worth of emergency funds set aside in a savings account?
• Have I discussed my pre-retirement goals, such as buying a house or saving for my children's education, with my partner?
• Have I discussed my risk tolerance and financial goals with a financial professional?

Popular non-retirement investments

Options abound when it comes to non-qualified accounts. Here are some common types:

• 529 education plans:Funded with after-tax dollars, any gains in a529 planare tax-deferred and funds can be used tax-free when applied to qualified education costs.
  
• Brokerage accounts:You can buy and sell taxable investments –such as stocks, bonds, mutual funds and exchange-traded funds (ETFs) – through a licensed broker or using aself-directed brokerage account. Trades made via a broker generally carry commissions and fees.
• Automated investment accounts:Run by algorithms that are programmed to make investments for you, with guidelines determined by a questionnaire. Also calledrobo-advisors, these accounts generally carry fees that are lower than more actively (human) managed funds.

Finding the right investments for you

Ready to invest beyond your retirement accounts? You may want to work with a financial professional to create and tailor a portfolio to reflects your financial goals. You should consider the following when determining the right investments for you:

• Fees:Brokerage and automated investment accounts have variable fees related to the amount of engagement required to open and maintain them. “The more hands-off the investment account, generally speaking, the lower the fees,” says Kujala.
• Risk tolerance:“Risk tolerance is the amount of market volatility you’re willing to accept as an investor,” says Kujala. There are generally afew key questionsthat can help you identify how comfortable you are with risk, which in turn can help you develop your investment strategy.
• Time horizon:Are you investing to meet short- or long-term financial goals? “The shorter the duration, the less volatile you want the investments to be. The longer the duration, the more ability you have to take some of those risks to potentially yield a higher return on your investment,” Kujala explains.
  

When it comes to finding the right allocation mix between retirement and non-retirement investments, Kujala says, “There’s no rule of thumb, but some diversification is key.”

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