tax savings

How to Start Investing

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How to start investing

So, you’ve landed your first “real” job! Now’s the perfect time to create your first investment plan and start investing.

First, let me congratulate you on getting through school and starting your first “real” job. You’ve worked hard to get here, and I’m sure there are many things you’ll want to spend your new paycheck on. An apartment of your own, some decent takeout (not from a student cafeteria), maybe a little traveling.

You should do those things, as long as they fit into your budget. You’ve earned a little breathing room. But now that you have some stability, you should also thinking about how to start investing for your future. Here are three ways to get the ball rolling.

1. Pay down debt

As a student, you may have accumulated a mix of debt, from student loans to credit cards. Create a debt-repayment plan that focuses on paying off your high-interest debt, like credit cards, first.

Student loans often carry lower interest rates, so these loans might not be your top priority. At the same time, many student loans require you to make a minimum monthly payment shortly after you graduate, and you only have so much time to repay the entire loan. You still need a loan-repayment plan to make sure you don’t default on these loans.

2. Build your emergency fund

Post-graduate life isn’t all sunshine and rainbows. Sometimes your air conditioner breaks down in the middle of a heat wave or your car dies on the way to a meeting. I suggest putting 10% of your paycheck into an emergency fund to cover unexpected expenses. The goal is to eventually have enough money in your emergency fund to cover three to six months’ worth of expenses, but it can take a while to get there.

Your emergency fund should be low risk and easy to access, like a regular savings account.

3. Think about retirement

This is the best time to take advantage of the power of compounding. If you start putting just $200 a month into a retirement savings account at age 25, and let it grow over the next 40 years at a 4% rate of return, you’ll have about $237,000 in that account when you turn 65.

Wait another 10 years to start investing the same amount at the same rate of return, and you’ll reach age 65 with about $140,000. That’s a big difference.

If your employer offers a 401(k), use it. With this tax-advantaged retirement account, you contribute pre-tax dollars directly from your paycheck. You employer will also match your contributions up to a certain percentage of your salary.

If you don’t have a 401(k), look into a traditional IRA (individual retirement account) or Roth IRA. With a traditional IRA, you’ll get a tax break on your contributions, while with a Roth IRA, you won’t pay federal taxes when you withdraw money in retirement. With both types of IRAs, you won’t pay taxes on any investment income you earn within the plan until you start making withdrawals.

Ready to start investing? Contact me today and we’ll work on creating your first investment plan.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.

Roth IRA Advantages

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We have a special blog post tonight from the one and only Senor Frog, one of our biggest fans, submitting this question through the website contact form – What are the advantages to setting up a Roth IRA plan?  Great question Senor, thanks for writing us!  First, a Roth IRA is a retirement account for individuals.  The contributions (money you put in each year) grow tax free, and then when you pull the money out it is also tax free!  Pretty nice right?  Does this sound to good to be true?  All these tax advantages, there must be a catch, and there are, a few anyway…

Roth IRA

  1. Income Limits – not everyone can open a Roth IRA, you have to be below a “Modified AGI” (Adjusted Gross Income) amount each year.  In 2018, the amount for married couples filing jointly to make full contribution amounts is $189,000, and single/head of household tax filings the max modified AGI is $120,000.  If you file married but filing separately, contact your tax specialist for plan details.
  2. Contributions Limits – with tax advantages who wouldn’t want to put all the money they can into this plan, this includes me, what’s the maximum each year?  In 2018, the maximum contribution to a Roth IRA is $5,500, or your total taxable compensation amount for the year, if your compensation was less than $5,500.  Bonus for the 50+ crowd, if you are age 50 or older, the maximum contribution amount is $6,500.  This additional amount is often referred to as the “catch-up” provision.
  3. Tax Limits – what tax limits, in the intro of this post there was nothing but tax advantages!  With a Roth IRA, there is no income tax deduction on the contribution amounts.  This is also the reason when you withdraw the funds it is tax free, because you already paid taxes on the money you put in!  Also, unlike a non-qualified brokerage account, if you have a loss in the account there is no tax write-off for the losses incurred.
  4. Withdrawal Limits – if you satisfy the requirements, qualified distributions are tax free.  The basic qualified distribution would be pulling money out of this plan after age 59 1/2.  However, if the account has grown and you are under the age of 59 1/2 you are penalized if the withdrawal includes contributions and gains.  In this scenario, the gains are taxable and penalized.
Roth IRA Advantages

Hmmm, not sure this plan sounds so great anymore, read on, it gets better!  The advantages of the Roth IRA plan are:

  1. It’s a savings plan often used alongside a 401(k) or other retirement plan to mix tax strategies in retirement.
  2. The contributions made into the plan grow tax free. Compounding tax free growth adds up to a lot of money over 10, 15, 20, or even 30+ years.
  3. If you still have earned income, you can make contributions to this plan beyond age 70 1/2. People are living longer, and working longer, this may be a bigger advantage than people think.
  4. There are not RMD’s (Required Minimum Distributions) with this plan. Unlike a IRA/401(k), at 70 1/2 nobody (IRS) is demanding you take a certain amount each year. This is very important during market corrections or downturns.
  5. And finally, tax free withdrawals! Wouldn’t it be nice after paying 30 or 40 years of taxes to receive tax free income.

Summary: It’s not a perfect plan, those don’t exist.  But this plan offers tremendous tax savings opportunity. To grow a retirement account over a working period of time, whether its 40 years or 5 years.  If you would like to speak with one of our advisors regarding how you can take advantage of a Roth IRA, contact us today.

For more information on individual retirement planning, follow this link.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.