Wayne Farlow //February 29, 2012//
With the goal of minimizing annual taxes, many people put almost all of their savings into a 401(k), IRA or other tax deferred retirement plan. Conventional wisdom is that you should always save as much as possible in tax deferred accounts.
Unfortunately, this approach may be very costly if a financial emergency occurs or if tax deferred funds are needed for your children’s college expenses. Here are some tips that may help when deciding where to put your savings:
A major 401(k)/403(b) plan sponsor is TIAA-CREF. The traditional TIAA plan is a Stable Value fund with a guaranteed a rate of return that changes annually. Funds invested in the traditional TIAA Stable Value fund, are similar to entering “Hotel California.” Once they are deposited in this Stable Value fund, they may only be removed over a 10-year period. The maximum yearly withdrawal from a TIAA traditional fund is limited to 10 percent of the funds available. Since market conditions and personal financial conditions may change, be very cautious when considering placing a significant amount of retirement plan funding into what may effectively be an illiquid investment, if the funds are required within ten years.
Due to the many restrictions, contribution limits and penalties associated with tax deferred retirement plans, it is important to carefully consider your savings alternatives. Working with a qualified financial adviser who, as your fiduciary, always places your interests first, develop a strategy that both minimizes taxes and provides for penalty free funds that may be required before your retirement years.