By: Gene Walden, Senior Finance Editor March 20, 2018
Millions of Americans invest in retirement accounts to save for their long-term needs, but what about the shorter-term goals such as buying a home or car, sending the kids to college, or taking that dream vacation?
Does it make sense to invest for interim goals or should you play it safe and simply deposit your money in a bank or money market account?
The answer may lie in your time horizon and your threshold for risk. Generally, shorter-term goals may mean a less aggressive investment strategy. If you hope to use your investment savings in the next five to 10 years, you might choose a more moderate and diversified mutual fund, such as an asset allocation fund that invests in a diverse portfolio of stocks, bonds and other investments. Although diversification – with several asset groups feeding into the performance of the portfolio – does not eliminate risk, it may help reduce losses during stock market fluctuations.
(Thrivent Mutual Funds offers four asset allocation funds that are automatically diversified and range from moderately conservative to aggressive.)
The shorter your time horizon, the greater the risk of volatility may be. The investment markets have historically been volatile in the short-term, but typically evened out over time as the economy went through its various cycles. That’s why a long-term investment strategy for your retirement fund may be considered more appropriate than investing for near-term goals.
For instance, for short-term goals, some individuals may be comfortable investing their money in the market, while others may prefer to put the money in a bank savings account or a money market fund, such as the Thrivent Money Market Fund1, that carries less risk.
But if you expect to buy your next new car or take your next dream vacation several years from now, or if you’re saving for your children’s education, a house or a second home or other long-term goals, investing a portion of your savings in the market may be more suitable.
Consider If Investing in Mutual Funds May Be Right for You
If you’re willing to take some risk with your short-terms savings in exchange for the potential for appreciation beyond the low yields currently offered by most banks and money market funds, Thrivent Mutual Funds offers a couple of conservative bond funds that may fit the bill. And, like nearly all mutual funds, they provide liquidity for investors who may need their money on short notice – although the amount of money that would be available to you would vary depending on the performance of the funds:
The Thrivent Government Bond Fund seeks total return, consistent with preservation of capital. The Fund primarily invests in securities issued or guaranteed by the U.S. government or its agencies and instrumentalities. The value of the Fund is influenced by factors impacting the overall market, debt securities in particular, and the U.S. government. While the fund is conservatively managed to seek preservation of capital, it may experience loss of principal under certain market conditions. Learn more about the Thrivent Government Bond Fund.
The Thrivent Limited Maturity Bond Fund seeks a high level of current income consistent with stability of principal. This fund invests primarily in investment-grade corporate bonds, government bonds, asset-backed securities, mortgage-backed securities and collateralized debt obligations. The value of the Fund is influenced by factors impacting the overall market, debt securities in particular, and specific issuers. The Fund seeks to invest in shorter duration bonds that are less sensitive to interest rate changes than some longer-duration funds. Learn more about the Thrivent Limited Maturity Bond Fund.
Investment Accounts for Interim Goals
Which type of mutual fund you invest in is one consideration, the other is what type of account you will put your funds in. Here are several types of accounts you may want to consider.
Retail Investment Accounts
Retail Investment Accounts are taxable accounts that are often used when saving for interim goals. One of the primary reasons investors seek general investment accounts is the flexibility they can provide. Unlike a retirement account or annuity, you can withdraw funds penalty-free in the near-term if you need or want to, although you will pay taxes on dividends and capital gains. Thrivent Mutual Funds offers taxable accounts with the flexibility of either single or joint ownership.
If you have a goal coming up in a few years, you could begin a monthly automatic investment to allow you to begin saving now. (You can set up an investment account with Thrivent Mutual Funds for just $50 a month. See: Start Building Your Nest Egg for Just $50 a Month)
But retail accounts may not be your only option for saving for these goals. There are other popular tax-advantaged savings accounts that can help you save for interim goals, such as education, a mortgage down payment or other interim expenses. These accounts typically offer several investment options, including mutual funds of various risk levels, and money market funds for shorter-term savings:
Traditional and Roth IRAs
Traditional and Roth Individual Retirement Accounts (IRA) are generally considered retirement savings plans but they may offer many advantages for individuals as they’re saving for retirement as well as during their retirement.
When the IRA rules were enacted, Congress also included some provisions specifically designed to help working Americans defray some of the costs of other important life milestones, such as qualified educational expenses, the down payment on a mortgage, or as an emergency fund.
Roth IRA contributions are made with after-tax dollars and are not deductible on your current year’s taxes, but contributions would grow tax-deferred, and you would have the benefit of tax-free withdrawals later if you meet the requirements for a qualified distribution. In fact, contributions (not earnings) can be withdrawn from your Roth at any time for any reason, federal tax and penalty free. There are several requirements that make a distribution “qualified,” which are found in detail in IRS Publication 590.
But please keep in mind that the primary purpose of an IRA is to save for the long term to help fund your retirement. If you can cover the costs of your interim initiatives through other means – bonuses, savings, or separate investment accounts – you will likely be better prepared for retirement when the time comes. In addition to being able to withdraw Roth IRA contributions tax-free at any time, it gives you the flexibility to take a distribution for certain interim goals, including:
Buying a home. First time home buyers – those who have never owned a home or have not had a financial interest in a home during the past two years – have a one-time option, before age 59 1/2, to withdraw up to $10,000 from an IRA to use as a down payment without an early withdrawal penalty. Your spouse can also withdraw up to $10,000 for the down payment.
Educational funding. A distribution from an IRA before age 59 1/2 would be subject to income taxes, but not the 10% early withdraw penalty – if the money is used for qualified equational expenses.
But before you use your IRA retirement funds for your children’s educational expenses, you should consider exploring other options (see Saving for Education, below) – and leave your IRA untouched to cover your own expenses when you retire. Learn more about qualified withdrawals.
Saving for Education
If one of your interim goals is to save for your children’s educational expenses, there are a couple of tax-advantaged educational savings programs that you may consider, including a Coverdell Education Savings Account and a 529 education savings plans.
Both plans allow you to set aside money for a designated beneficiary, under age 18, for use to cover qualified expenses for either qualified higher education or qualified elementary or secondary school. Qualified educational expenses include such costs as tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution.
Although the money you contribute to these plans is not deductible from your current taxable income, the account grows tax-deferred and distributions used for qualified educational expenses are also tax-free.
Changes in the tax plan that the U.S. Congress passed and the president signed into law in December 2017 added some important provisions to the 529 plan that allow parents to use the account not only to cover expenses for higher education (such as college or a trade school) but also for private elementary and secondary school. While Coverdell plans may also be used for the same purpose, 529 plans offer more flexibility and significantly higher annual contribution limits than Coverdell plans. (See: How to Choose a 529 Educational Savings Plan).
You may wish to talk to a financial advisor to learn more on the rules and benefits of 529 and Coverdell plans or to establish an account. You may also open a Coverdell account online through Thrivent Mutual Funds. (See: Start Your Education Savings with a Coverdell Plan)
When you’re investing for interim goals – whether it’s within a retail investment account or tax-deferred account – it’s important to consider the risks. Thrivent Mutual Funds offers more than 20 mutual funds with varying risk levels that are designed to help investors address a range of goals and objectives – both in retirement and throughout life.
At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.
The concepts presented are intended for educational purposes only. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product. At Thrivent Mutual Funds, we recommend you consult your tax advisor to make sure you’re getting the most out of your investments. Thrivent Mutual Funds and their representatives cannot provide legal or tax advice.
1 You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
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