5 Investment Options for 401ks

When you are deciding which 401k investment options will suit your needs, you will need to consider the long-term impact of your decisions. Particularly because 401k accounts are tax deferred, the tax implications of your investments should weigh heavily on your decision. Ultimately, the goal is to have as much money as possible in your 401k at the time you aim to retire. The short-term benefits are important only in terms of following the law and keeping your taxes low.

Company Stock and Stock Funds

You may elect to invest directly in company stock. If your 401k is administered by a public company, you likely receive stock as part of your benefits package. This can go directly into your 401k, and you will not be taxed on dividends or growth until you take the funds out of your account. If you wish to diversify but still hold company stock, consider a stock mutual fund. This can help you own equity in various companies at once without streamlining your holdings so much as to narrow your portfolio.

Bonds and Bond Funds

If you are more conservative with your investments, you may consider bonds or bond mutual funds. Here, you are purchasing with the intent of long-term growth, and yield is a side benefit of your investment. One of the major benefits of bond investment is tax-free growth, reducing the amount you will owe when you eventually withdraw from your retirement account. However risk-free these investments may be, the security comes with a cost, and you can end up limiting profits by investing in bonds alone.

Growth Mutual Funds

Growth mutual funds aim to purchase low dividend, under valued equity that will grow over time. These funds target securities that have been under traded in the past, leaving them to have a relatively low price tag when compared to their potential value. In the short run, since the securities have a low value, dividends may be low. However, since you do not earn income from your 401k, a dividend is not as important with these investments. 

Income Mutual Funds

Why would you want dividends at all in a 401k? You can reinvest dividends within your account to grow your holdings even further. For this reason, income mutual funds may still be a good option within your 401k account. You cannot withdraw the dividends periodically without paying a penalty. However, you can simply reinvest the dividends, deferring tax payments while growing your portfolio for retirement. Remember: your original cost basis is transferred when you reinvest dividends to create capital gains. This can result in a high tax payment when you do eventually withdraw funds.

Money Market Funds

Money market funds tend to be low risk and stable, which makes them a great option for a mutual fund. Like bonds, money market funds may not make you rich quickly. However, in terms of slowly growing your retirement savings, they can assist in diversifying your portfolio to hold low-risk, constant growth options. 

What is the safest 401k investment strategy?

If you are concerned only about safety with your 401k investment strategy, the best option will lie in government bonds. Government bonds are backed by the full faith and credit of the US Treasury. As a result, even if the government is having difficulty repaying the debt, it can simply print money in order to issue full repayment. You are guaranteed to receive back at least an amount equal to that you deposited on a government bond, and you will earn a yield in the meantime. The profit on this investment depends on whether the yield outpaces inflation. For added security, consider inflation-protected bonds.

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