Stop Singing the 401(k) Blues

When investing, it's important to keep your eye on the prize. Saving on taxes is important, but it isn't everything. That said, one type of investment that's pretty tax-efficient is index funds.

Tax-Efficient Funds

Index funds track a particular market index, such as the S&P 500, which consists of the stock of 500 large companies. With an index fund, the fund manager simply buys and holds the same stocks that are in the index. The management fees are usually extremely low. And, because the manager doesn't do a lot of trading, the taxable gains distributed to shareholders are typically much smaller than what you'd experience with an actively managed fund.

You actually don't get a bad tax deal when investing outside of a tax-advantaged IRA or 401(k). In a regular brokerage account, you'll pay tax on dividends but many stocks don't pay dividends at all. And as long as you hold a stock or mutual fund for more than a year, you'll pay capital gains tax at the relatively low rate of 15% when you sell.

Put Your Savings on Autopilot

And here's one last tip: No matter what type of account you use to save for retirement, put your contributions on autopilot. Decide how much you want to save and invest each month. A good target is 10% of what you earn. Have this amount automatically transferred into your retirement account. You can set it up so that the money is used to automatically buy shares of a particular mutual fund. You'll be surprised by how quickly those small, regular contributions can add up.

Cha-ching! That's all for now, courtesy of Money Girl, your guide to a richer life.

As always, everyone's situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.