The best long-term investments are ones that provide the right balance of risk and reward. There's no magic formula, but the following investments may come in handy if you have a long investment timeline. The idea is to stick with your investment plan, even during periods of volatility. Ideally, your portfolio will have time to bounce back from short-term market swings—and provide worthwhile returns in the long run. Here are some options to consider.
1. 401(k)s
A 401(k) is a tax-advantaged retirement account. If you start saving early, it can allow for decades of compound interest. Traditional 401(k)s are offered as an employee benefit, but self-employed folks can look into solo 401(k)s.
Pros
- Your contributions are tax-deductible. That reduces your taxable income during the years that you're saving. Your 401(k) contributions are typically made on a pretax basis through automatic payroll deductions.
- You may be eligible for an employer match. Your employer might match some or all of your contributions, up to a certain limit. That's essentially free money for retirement.
- You're building your nest egg. In 2023, you can contribute up to $22,500 to a 401(k). Workers who are 50 and older can kick in an extra $7,500. Over time, the money you put in can add up to a sizable chunk of retirement income.
Cons
- Your 401(k) distributions count as taxable income. When you begin making 401(k) withdrawals in retirement, that money will be taxed as ordinary income. Failing to plan ahead could result in an unexpected tax bill.
- Required minimum distributions (RMDs) apply. As of 2023, you must begin taking RMDs from 401(k)s at age 73. That age will go up to 75 in 2033.
- There are early withdrawal penalties. In most cases, tapping 401(k) funds before age 59½ will trigger a 10% early withdrawal penalty. You will also be taxed on the withdrawal as regular income.
2. Individual Retirement Accounts (IRAs)
IRAs are meant to help investors save for retirement—and they come with attractive tax perks. Traditional IRAs and Roth IRAs are among the most common types of IRAs.
Pros
- IRAs have unique tax benefits. With a traditional IRA, your contributions may be tax-deductible. Roth IRAs, on the other hand, are funded with after-tax dollars. If you've had your Roth account for five years and are 59½ or older, you can withdraw contributions and earnings at any time, tax- and penalty-free.
- You can open an IRA yourself. Traditional 401(k)s are only available through employers, but anyone can open and fund an IRA through a participating brokerage or other financial institution.
- IRAs can help diversify your retirement income. Relying solely on a 401(k) for retirement income means you'll get taxed every time you make a withdrawal. Having a Roth IRA in the mix can provide a tax-free source of income when you're no longer working.
Cons
- IRA contribution limits are on the lower side. In 2023, you can contribute up to $6,500 across all your IRAs (or $7,500 if you're 50 or older). That's much lower than 401(k) contribution limits.
- Traditional IRA distributions are taxable. Just like a 401(k), you'll be taxed on withdrawals you make in retirement. Early withdrawal penalties and RMDs also apply.
- Roth IRAs have income limits. As of 2023, single tax filers who have a modified adjusted gross income of $153,000 or more cannot contribute to a Roth IRA. That number jumps to $228,000 for married couples filing jointly.
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3. Mutual Funds
Mutual funds pool money from multiple investors. When you purchase shares of a mutual fund, you're effectively buying a slice of the fund. That entitles you to a portion of its capital gains and income. Mutual funds that are structured as index funds or target-date funds may be well suited for long-term investing.
Pros
- They offer a safer way to invest in stocks. Mutual funds provide access to the stock market but are generally seen as less risky than individual stock investing. Trying to predict winning stocks—and timing when to buy and sell—is far from an exact science.
- They provide diversification. Mutual funds typically invest in a variety of asset classes, sectors and companies. That provides built-in diversification, which can help reduce overall investment risk.
- Actively managed funds are less work for investors. Some mutual funds have managers who make investment decisions on behalf of the fund. That can be a good option for investors who prefer a more passive role.
Cons
- There's likely a minimum investment. Every mutual fund is different, but initial entry costs can range anywhere from $500 to $3,000.
- You can expect fees. There may be fees to buy into mutual funds, as well as operational costs associated with maintaining them. Mutual funds tend to cost more than exchange-traded funds (ETFs), but they're better suited for long-term investing.
- Investment options may be limited. If a fund manager is at the helm of a mutual fund, they'll make investment decisions on behalf of investors. That may feel limiting to investors who like being actively involved in their holdings.
4. 529 Savings Plans
If you're putting money aside for college, a 529 savings plan can be a great long-term savings vehicle. It's an investment account that's designed specifically for education expenses. It can hold a variety of assets, including ETFs and mutual funds.
Pros
- Earnings are (usually) tax free. You won't be taxed on investment earnings if funds are used to cover qualified education expenses. That includes tuition, room and board, supplies and more.
- You may get potential tax breaks. Withdrawals from 529s are exempt from federal income tax. That may also apply at the state level. Some states also offer income tax deductions or credits.
- The funds in a 529 can be transferred to other students. If the original beneficiary doesn't use all the money in a 529, you can likely transfer the plan to another student.
Cons
- Your state may tax you on 529 withdrawals. Depending on where you live, 529 withdrawals might be subject to state income tax.
- Your investment options might be limited. Some 529 savings plans are limited when it comes to investment options. You may not have access to a wide variety of assets.
- You'll be penalized for using 529 funds for nonqualified expenses. That translates to a 10% penalty and taxes on any earnings that were withdrawn for non-qualified educational expenses.
5. Certain Government Bonds
Bonds are debt securities. When you buy one from the federal government, they're obligated to repay you with interest. Treasury bonds are available in terms of 20 or 30 years. Savings bonds are different from Treasury bonds but also earn interest for multiple decades.
Pros
- Your risk is low. Government bonds are considered safe investments—chances are slim that the federal government will default on its payments.
- They're easy to buy and sell. You can buy and sell Treasury bonds and savings bonds through TreasuryDirect.gov or a broker, bank or dealer.
- They provide reliable returns. When you purchase a government bond, you know what you're getting. Returns are predictable and can help diversify your investment portfolio.
Cons
- Interest rate changes can diminish your returns. If you buy a fixed-rate bond and then interest rates increase, you'll be locked into that lower rate until the bond matures or you sell it.
- Returns can be modest. Government bonds typically generate lower returns than stocks and other high-risk investments. Inflation can also eat into your gains.
- Your money can get tied up in bonds. A money market account or high-yield savings account may offer better returns and more liquidity than government bonds.
The Bottom Line
If you're a long way out from retirement, or saving for other long-term financial goals, it might make sense to adjust your investments. That often requires diversification and holding a variety of high- and low-risk assets. Your asset allocation will likely change over time as you work toward different goals.
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