October 27th, 2020
Are you new to the investment game? Do you know how to get started? If you’re a beginner looking for a simple guide to get on your feet, this episode of Making Finance Fun is for you. I’ll help you define why you’re investing, how you’re going to invest, and what you’re going to invest in. My 3-step guide to get started is so easy, a caveman could do it. (But really, who else remembers those hilarious commercials?)
Outline of This Episode
- [3:23] #1: WHY are you investing?
- [7:09] #2: HOW are you going to invest?
- [8:58] Pros and cons of the Roth IRA
- [12:52] Pros and cons of the Traditional IRA
- [16:27] The lowdown on the 529 account
- [20:27] All about your 401k options
- [23:55] #3: WHAT could you invest in?
#1: WHY are you investing?
You need to define why you’re investing. Here are some reasons I often come across:
- You’re investing for retirement
- Saving for your kid’s college fund
- You’re focused on wealth-building
- You want to increase your net worth
- To fulfill some short-term goals (i.e. a new car)
Why do you need to define your why you’re investing? To determine how you’re going to invest.
#2: HOW are you going to invest?
What vehicle are you going to use for your investment? If your goal is to save for retirement you can open a Roth IRA, Traditional IRA, 401k, 403B, a Simple IRA, or a SEP IRA. If you’re saving for college for a child, you can open a 529 account. But what do I get asked about the most? Roth IRAs, Traditional IRAs, 401ks, and 529 accounts. So I’ll briefly talk about each of these options.
Roth IRA vs a Traditional IRA
The Roth IRA is a great account for saving for retirement. If you’re under 50, you can contribute up to $6,000 per year (as of 2020). If you’re over 50, you can contribute $7,000 a year. You do not get federal or state tax deductions. The plus side? You don’t owe taxes on the gains. Whatever you withdraw after turning 59 ½ will be withdrawn tax-free and penalty-free. However, if you withdraw the gains before 59 ½ you can be assessed taxes AND a 10% penalty.
With a Traditional IRA, you DO get a federal income tax deduction for what you do contribute. You also get tax-deferred growth. But you have to pay taxes when you withdraw money. If you need an immediate tax deduction, this may be the way to go.
What are your options if you make above the tax-deduction threshold? Listen to learn more!
The lowdown on the 529 account
A 529 account is the first thing people think of when they want to save money for a child or grandchild for college. Some states even give you a tax deduction. For example, Illinois allows you to receive a deduction for up to $10,000 individually or $20,000 in a joint account. To find out which state does (or doesn’t) offer deductions, see the chart linked in the resources.
What if your kid doesn’t go to college? What if they want to start a business instead? The worst case scenario is that you pay income taxes and a 10% penalty on the earnings if the child decides not to go to college. Or, you can transfer the ownership. Are there other college savings options? Listen to find out! Plus, I share some details on 401k plans.
#3: What could you invest in?
There are many investment options: ETFs, stocks, mutual funds, bonds, money market funds, CDs, brokerage CDs, bank CD’s, hedge funds, etc. That isn’t even an exhaustive list. However, inside a 401k you are limited to the choices they give you.
Sometimes, a brokerage window can open up that allows you to invest in whatever you want (not just the options they normally allow). But this can be dangerous if you aren’t an experienced investor.
Within an IRA you can virtually invest in anything you’d like. The only three things you can’t own includes life insurance, collectibles, or—generally speaking—physical precious metals. You can even own real estate in an IRA.
To hear more information about my 3-step guide to investing, listen to the whole episode!
Resources & People Mentioned
- Maximum 529 Plan Contribution Limits by State
- 529 Tax Benefits by State
- A Penalty-Free Way to Get 529 Money Back
- Hardship Distributions
- What Are Salary Deferrals?
- 5 Investments You Can’t Hold in an IRA/Qualified Plan
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