For many, if not most of us, the money we've socked away in our employer-sponsored retirement plan represents the biggest portion of our nest eggs. Trouble is, too few of us take maximum advantage of our plans. And even those who do might not be putting money to work in other investment vehicles that also provide tax-favored earnings growth.
Some folks, however -- perhaps even the coworker stationed in the next cube -- know exactly what it takes to get the job done.
Want the inside scoop? For starters, you should ...
Take the money and run
If your company matches retirement-plan contributions up to a certain level, make sure to kick in at least as much as they'll match.
Even if your firm's plan isn't the greatest in the world, it's hard to beat doubling your money while reducing your taxable income. And of course, the deal is sweet indeed if you're among those lucky workers whose plan offers a cream-of-the-crop lineup of mutual funds. But what, exactly, constitutes one of those?
Good question. Cheap price tags and seasoned management are key, as is market-cap and valuation diversity. On that front, your plan should feature an "anchor" fund that specializes in high-quality big boys such as Bank of America (NYSE: BAC ) , Wal-Mart (NYSE: WMT ) , and Johnson & Johnson (NYSE: JNJ ) -- stalwarts whose price-to-earnings ratios currently clock in below their respective industry averages. It should also provide a fund whose managers look down the market's cap range and toward growth-oriented fare such as Sepracor (Nasdaq: SEPR ) , Red Hat (NYSE: RHT ) , and Urban Outfitters (Nasdaq: URBN ) , stocks with rich P/Es and, not coincidentally, earnings-growth estimates of 20% or more over the next five years.
The bottom line? If your plan keeps a lid on costs and provides vehicles that you can, um, drive across the market's cap range and valuation spectrum, then give your administrator props: He or she has provided a smart way to build a diversified portfolio.
Take it to the limit
Another smart way for retirement-minded workers (i.e., all of us) to proceed is with a Roth IRA. Provided you don't exceed the income limits, you can contribute to a Roth in addition to the moola you plunk down in your 401(k), and savvy investors should do just that. Yes, unlike a traditional IRA, you'll invest after-tax dollars. The tradeoff, though, is that when you pass the 59-and-a-half-year mark, you're free to tap those proceeds -- which grow on a tax-free basis -- without paying Uncle Sam a single cent in taxes.
When it comes to preparing for your financial future, then, a Roth is another deal that's tough to beat.
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This article was originally published on Dec. 7, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. Bank of America and Johnson & Johnson are Income Investor recommendations. Wal-Mart is an Inside Value recommendation. You can check out the Fool's strict disclosure policy by clicking right here.