The Fourth Rule of Successful Mutual Fund Investing:
TAKE ADVANTAGE OF TAX-ADVANTAGED ACCOUNTS WHENEVER POSSIBLE
Retirement plans such as Individual Retirement Accounts (IRAs), Roth IRAs, 401(k)s, and 403(b)s are a gift to investors. They provide incredible tax advantages, either by allowing your funds to grow tax-deferred (allowing you to delay paying taxes for several decades in many cases) and/or by providing a tax deduction with each contribution. Many companies provide employees with a matching component in their 401(k) plans, which lets your nest egg grow even more quickly. In contrast, if you neglect the opportunity to invest in a tax-advantaged plan and solely invest in taxable accounts, current-year taxes will slow the overall growth of your assets. (You should probably still make a point of investing in taxable accounts, since you may be penalized if you withdraw money early from a retirement plan.) These retirement plans are often great vehicles for mutual funds, and often funds are the only kinds of investments you will be allowed to make in them. You should aim to “max out” all available tax-advantaged investment opportunities to the fullest extent possible.
Next blog will cover rule #5: “Intelligently diversify your funds and allocate your assets.”
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