Street Art in Shanghai
Tax season is in full effect, and you may be wondering what to do with that refund. You may be contemplating a vacation, new pair of shoes, or a new laptop. Before spending your refund consider making your money work harder for you. The taxes were already taken out, right? So the money has already technically been spent, right? So why not invest it in your future fabulous self? You may be wondering how to get started, so here are a few tips, tricks, and options to consider when investing your money.
How do I start investing?
Some companies don’t offer a 401k investing plan, but there are other options out there to start saving for retirement and the sooner the better. Many banks offer free consultations with a licensed Financial Advisor who can offer advice on products and services that may be right for you. Advisors should evaluate the type of risk you are comfortable with and the amount of return (usually in the form of interest) and the length of time. Generally speaking the younger you are the more aggressive of an investor you can be. It’s important as a consumer to do your due diligence to keep yourself protected, so it’s important to be informed of the companies you are putting your hard earned money into. Get recommendations from friends or family members for a Financial Advisor you can trust. There many different types of investment products out there, but one of more general options is to open an IRA.
What is an IRA?
Let’s start with the basics; IRA stands for an Individual Retirement Account. These accounts are used to help you save for your future retirement. Do you still want to be able to afford a certain life style even after you stop working? If the answer is yes then an IRA is a good place to start. This is a separate account from an employer-sponsored plan such as a 401k. The primary benefit of an IRA is to provide an additional source of income at retirement.
What are the different types of IRA’s?
The types of IRA’s that are important and relevant are Traditional and Roth. They are the most commonly used and the easiest to understand.
What is the difference between the types of IRA accounts?
Roth IRA contributions are never deductible on your income tax filing. The funds you contribute (not including interest) to a Roth IRA can be distributed at any time, for any reason, free from income tax and the 10% penalty tax. Traditional IRA contributions are tax deductible and subject to the penalty tax for a non-qualified withdraw, along with being reportable income on your yearly income tax filing. In a Traditional IRA the earnings (interest) remain non-taxable until you retire.
At age 59 ½ you are eligible to start taking distributions, but in a Traditional IRA these distributions are considered taxable as income. The disadvantage with a Traditional IRA is when you are paying into it you may be in a lower tax bracket, but when you go to take the money out you may be in a higher tax bracket which would result in paying more in taxes. In a Roth IRA the distribution after age 59 ½ is not taxable income. A Roth IRA is generally the best option for younger adults just starting out. There are a lot of rules and regulations to these types of accounts, so it’s very important to know all the details or have a professional you trust to help manage these type of accounts.
What to do when you’re not quite ready to invest:
Maybe you are just starting out in your first job after college and the thought of an investment account makes you hyperventilate, but you still want to save. Personally I have two different “savings” accounts. I have one that earns a very small amount of interest that I use to save for car repairs, insurance, emergency fund, large or unexpected purchases that may come up. My other “savings” account is actually a free checking account with no minimum balance or monthly service fee, which is key when you want to save. I don’t have a debit card to this account or checks. I use it primarily to save for shopping trips, smaller items, and vacation. I take out a small amount every paycheck, around $50-75 to set aside in this account. I really find this helpful when budgeting and it forces me to think ahead and narrow down what is really important and how much I can afford.
Consider investing a partial amount if not the full amount of your tax refund into a qualified plan such as an IRA, and this can be the only contribution you make all year aside from the opening deposit amount. Another investing option is to have a monthly amount automatically deducted from your checking account, and most plans have a minimum contribution amount of $50 per month. There may be some short-term sacrifices but in the end you will see results that were well worth the challenge in your youth.
Investing your money can be scary since for most people it’s not something that you think about everyday, but the importance to start young is crucial. It definitely was not easy for me to get started because I was convinced that I absolutely needed every dollar I took home. It’s taken me almost seven years working in the finance industry to really get serious about my financial future, and I regret not starting at a much younger age. It’s especially easy to talk yourself out of saving when you don’t bring home much to begin with, but just getting started is easier than you think.
The content in this article is not sponsored by Quarterlette or it’s affiliate(s). Investment products are not obligations of Quarterlette or it’s affiliate(s) and are not endorsed, recommended or guaranteed by Quarterlette, affiliates, or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principle is possible. The author (affiliate) is a licensed financial professional. The information referenced in such article is general knowledge. Consult a licensed financial advisor for further product information before investing.