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Retirement Plans and Mutual Funds

Now that the time has come to start thinking about your retirement years, here are some of the options you have available to secure your financial wellness:

  1. 401k plans
  2. IRAs
    • Normal IRAs
    • SEP IRAs
    • Roth IRAs
  3. SIMPLE plans
  4. HR 10 plans (Keogh plans)

The advantage of all of these funds is that they permit the inclusion of whatever mutual funds you consider beneficial. Keep in mind that you have left up to your employer to establish your retirement plan, it is up to him/her to select the mutual funds to be included or whether mutual funds should be included at all. Whatever the case, it is highly recommended to diversify among several mutual funds so that to set a well balanced financial portfolio. When choosing your retirement plan, you should check the tax implications that each of them has.

No Special Treatment to Different Types of Earnings

No matter the type of earning you have acquired, no differentiation is provided among them. This means that dividends get the same treatment as capital gains and no distinction is made between profits from interests on a certificate of deposit and interest on municipal bond.

The good thing about retirement plans is that no tax is charged whenever inflows are made in the account. An exception is made for earnings classified as "unrelated to the business". The rule of equal earning treatment is applied at its full power.

But, when the income comes out of the retirement account, they trigger taxable events, which are similar to the taxation of the regular income. An exception is made for the Roth IRA if certain requirements are met. In this case the distributions to the investors are tax exempt no matter the type of earnings.

To better grab the concept, consider the following example. You have decided to include mutual fund A in your IRA retirement plan. As a result you gain different types of earnings such as dividends, tax-free distributions to name a few. The withdrawal of the profits you have made will be taxed as an ordinary income.

As a result, tax benefits are not among the benefits you may experience when you include a mutual fund in your retirement plan, whatever type you have chosen. This is due to the fact that at one point or another you will be paid distributions, which are taxable events in all cases. Therefore, it is highly recommended not to include municipal bond funds in your IRA, since retirement plan tax implications can have a negative effect on your earnings.

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