Looking to lead a life of leisure during your dotage? Concerned that you won't have enough money in the bank to make that happen? Join the club -- and then move to the VIP section by taking advantage of incentives the IRS has put in place for late starters. Heck, even if you were an early starter, you can still avail yourself of ...
For both IRAs and 401(k)s, the IRS allows folks who are 50 or older to kick in more coin than their whipper-snapping compatriots. Meet that criteria, and you can contribute five thousand bucks to your IRA and $20,500 to your 401(k) for the 2007 tax year, as opposed to the $4,000 and $15,500 the younger set is allowed. Age, after all, has its privileges.
And just how much are those privileges worth? Well, if a 50-year-old invested a combined $25,500 each year between now and her 65th birthday -- and if that investment earned the market's historical rate of 10.5% annualized -- she'd have a nest egg of some $843,000.
The clock is ticking
Alas, our hypothetical later-starter may be shackled to a lousy (or worse) 401(k) plan -- one that might not have what it takes to help her meet or beat the market's historical average. The good news is that she's free to invest her IRA moola as she sees fit.
For reasons we explain in the March issue of Motley Fool Green Light -- a Foolish investing and personal finance resource -- those kinds of stocks could be fine candidates for an IRA. And while tax-favored accounts are of course sweet, taxable accounts should be part of every savvy investor's game plan, too. Used intelligently in tandem with vehicles like IRAs and 401(k)s, plain-vanilla taxable accounts can help feather a nest egg, too. After all, while the retirement vehicles we highlighted above could add up to a pretty penny, the assumptions we plugged in aren't sufficient to get the retirement job done.
The Foolish bottom line
How to use taxable and tax-favored accounts intelligently is the million-dollar question, of course, and it's one we've asked and answered in Motley Fool Green Light. Indeed, we've provided our members with a handy-dandy chart detailing the kinds of investments that are best-suited for taxable and tax-favored accounts, but the nutshell version is this: Investments that generate sizable chunks of taxable capital gains -- such as certain actively managed mutual funds -- or those that throw off generous income payouts -- such as the stocks mentioned above -- are generally best suited for tax-favored accounts. On the other hand, vehicles that are inherently more tax-efficient -- such as index funds -- can prosper just fine in a taxable account.
If you'd like to drill down from there -- and if you'd like to learn how to make the most of even a lousy 401(k) plan -- consider taking Motley Fool Green Light for a risk-free spin. Click here, and a 30-day guest pass is yours for the taking. There's no obligation to subscribe.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Lloyds is an Inside Value pick. GlaxoSmithKline and Enterprise Products Partners are Motley Fool Income Investor recommendations. You can check out the Fool's strict disclosure policy by clicking right here.