Investing can be an overwhelming topic for someone new to the workforce, or new to the world of investments. The number of choices to make is endless—which broker to use, should the Internet be used to place trades, how much money to invest, which investments to take advantage of, whether to buy stocks, bonds, mutual funds, or other investments, etc., etc. In this article we answer the question, where do I invest first?
1. Take Advantage of Employer Matched
The first place you should start is your employer’s retirement plans. Most companies offer a 401(k), 403(b), SEP plan, SIMPLE plan, or other type of retirement plan. The benefit of these plans is twofold: Savings added to these plans (up to the legal limits) currently are not taxed; these savings grow tax-deferred, and are not taxed until a distribution is made from your retirement accounts. The first thing you should look for within these plans is an “employer match.” An employer match occurs when a company agrees to add money to an employee’s retirement plan, if the employee also adds money to it. Therefore, you can basically give yourself a raise by taking advantage of this option, if it is offered. For example, an employer may offer to “match” 50% of your first 6% of contributions to the plan. This means that if you invest 6% of your salary into the retirement plan, your employer will add another 3%. If this deal is offered, take advantage of it. It’s as good as being handed free money. Sometimes, a retirement plan is not available to new employees for the first 6 months or the first year of employment. In this case, skip to step 2.
2. Consider a Roth IRA
A Roth IRA contribution only gives you a current tax break if your income is relatively low. In most cases, you will get no current tax break for making a Roth IRA contribution. However, funds invested in a Roth IRA grow tax-free. When money is eventually distributed from a Roth IRA, no income taxes should be due on these distributions. $5,000 can be contributed to a Roth IRA in 2011. If you are over 50 years old, you can contribute an additional $1000 in 2011.
3. Maximize Contributions to Your Employer Retirement Plan
After the Roth IRA is funded, your next step should be to make the maximum tax-deferred contribution allowed in your company retirement plan. Maximum contributions differ depending on the type of plan your employer offers. The plan administrators should have information available to help you determine your maximum tax-deferred contribution. Again, these contributions benefit you two ways, because the funds invested lower your current income tax liability, and the funds grow tax-deferred within the plan.
4. Invest Additional Savings in a Brokerage Account
If you have maximized retirement plan contributions and made your Roth IRA contribution, but still have funds available to be invested, a regular brokerage account is the next best place for these funds. This is an account with no tax benefits, but also without any restrictions regarding when you can access the funds within it. Any additional funds should be added on a regular basis to this account and invested.
Next we will focus on how to determine the most appropriate choices of funds within your retirement plan. For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].