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401(k) Fact |
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Many 401(k) plans are streamlining their offerings, to an average of 15 funds. Most people choose three or four funds. |
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Your 401(k) plan might offer anywhere from 3 to 100 or more investment choices. Choosing the right combination of investments is essential to setting your 401(k) portfolio on the right track. But before you begin evaluating your choices, you’ll want to consider several factors:
Other retirement assets. If you have other assets, such as individual retirement accounts (IRAs), taxable investments, pensions, or deferred annuities, you’ll want to consider the bigger picture before deciding how to invest your 401(k). If the bulk of those assets are allocated to more aggressive investments, for example, you might want to invest your 401(k) more conservatively to balance your risk.
Tax bracket. Your tax bracket may influence how you allocate investments among your taxable and tax-deferred savings plans. If your current federal income tax bracket is 33% or higher, investing retirement accounts in interest-paying investments will allow you to defer tax on this income until you withdraw it from your account. Meanwhile investing taxable accounts in growth investments lets you avoid taxable income now and lets you postpone paying capital gains tax until you sell the investments, perhaps a long time into the future. Remember that withdrawals from tax-deferred plans are taxed at your regular rate, not the lower long-term capital gains rate.
Risk tolerance. Your risk tolerance may depend on your own preferences, or the number of years you have until retirement. Generally, the younger you are, the more risk you can afford to take—and the less you can afford not to.
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