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Maximize your savings
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October 13, 2000: 11:06 a.m. ET
Are a 401(k) and an IRA enough to bet on? Better add a taxable account
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NEW YORK (CNNfn) - If you're already contributing the maximum amount to your 401(k) and IRA accounts, you may be wondering what else you need to do to ensure your retirement savings are sufficient.
In response to a reader's question, Barbara L. Steinmetz, a certified financial planner from Burlingame, Calif. and a member of the Financial Planning Association suggested saving more aggressively and investing in a taxable account.
Ask the experts a question
I am a single investor and need some advice on retirement investment strategy. I currently max out my 401(k) contributions and I invest $2,000 in an IRA each year. I would like to know your suggestions for investing additional savings for retirement that will provide good returns but not be offset by large tax implication.
You are to be commended for maximizing your 401(k) and also making IRA contributions annually. More important, you have realized what many people overlook -- savings in a 401(k) and IRA is fantastic but that alone will not be enough to cover the income needs that most people will experience in retirement. This means that you will also need to save aggressively and invest in a taxable account.
As you appear to be aware that good returns can often be evaporated by the generation of capital gains and taxable dividends, there are several ways to minimize the effect of tax erosion.
One obvious method is by using individual stocks so that capital gains are only generated on their sale and then hopefully at the long-term capital gains rate. The disadvantage with this approach, however, is that with a small- to medium-portfolio it is often difficult to adequately diversify your holdings.
There are a number of mutual funds that you can utilize that are "tax efficient" and could help with your portfolio diversification. Several funds that come to mind are index funds such as the S & P 500, White Oak Growth Fund, Van Wagoner Emerging Growth Fund and a number of Vanguard Tax-Managed funds.
However, do not discount actively managed funds out of hand as many of them produce sufficient returns to offset any associated tax liability. Also, just because a fund is tax efficient one year does not mean that it will also be in subsequent years. While minimizing tax seems to be an "American ideal," it should not be at the expense of returns. It is important to remember that the "tax tail should not wag the financial dog." 
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