Finding
the Fun in Mutual Funds
Some 93 million Americans own mutual funds, but not everyone is using them solely to
save for retirement.1 Of the 38 percent of
Americans who own mutual funds only outside a defined-contribution retirement
plan, more than one out of four has other plans for the money. Thirteen percent
have their earnings earmarked specifically for a car or other large purchase.2
Mutual funds can play an important role in a retirement plan, but they can also
be used to help accumulate money for other goals, such as a larger house, a
vacation residence, or a college savings program.3
Trade-Offs
A mutual fund pools investors’ money and constructs a portfolio from
individual investments, including stocks, bonds, and money markets.
When
you purchase a mutual fund inside your employer-sponsored retirement plan or a
traditional IRA, your contributions and any earnings are not taxed until you
begin making withdrawals. With some exceptions, withdrawals prior to age 59½
may be subject to heavy tax penalties.4
When you own a mutual fund outside a tax-deferred plan, any
earnings are taxed annually, but you can withdraw your money at any age without
tax penalties. Historically, of course, the longer money has been left invested,
the greater the chances have been of earning a gain.5
And many experts recommend investing in stock mutual funds only if you are
willing to commit your money for a minimum of five years.
Say you have plans to build your dream home someday, but you also want a
comfortable retirement and a college education for your kids. After you make
contributions to your retirement plans and the college funds, an extra $75
invested each month in a mutual fund could grow to $11,765 after 10 years,
assuming a 7 percent annual return and a 27 percent tax rate. That money could
help you build a larger home or allow construction to begin earlier than
planned.6
There are many kinds of mutual funds, but not all of them are suitable for
reaching intermediate goals. Knowledge of the appropriate mutual fund may help
you choose a fund that’s right for you.
1, 2) Investment Company Institute, November 2001
3) There are fees and expenses associated with investing in mutual funds,
including portfolio management fees and expenses and sales charges.
4) Distributions from most tax-deferred retirement plans are taxed as ordinary
income and, if taken prior to reaching age 59½, may be subject to an additional
10 percent federal tax penalty. Withdrawals must begin by April 1 of the year
after the year in which you reach age 70½.
5) Wiesenberger, 2002. Ranges consider the 40 one-year periods, the 36 five-year
periods, and the 31 ten-year periods from 1962 through 2001. Stocks are
represented by the S&P 500 Composite index total return, which is generally
considered representative of the U.S. stock market. The performance of an
unmanaged index is not indicative of the performance of any particular
investment. Individuals cannot invest directly in an index. Past performance is
never a guarantee of future results.
6) This is a hypothetical example used for illustrative purposes only and does
not represent any specific investment. Actual results will vary. It does not
take into account investment fees, which would reduce the performance described.
© 2002
Emerald Publications
