The reason that most people don’t begin to invest their money is because they think it is hard to get started or they don’t want to gamble with their money. Actually, it’s easy to get started on a well balanced plan that can increase the returns on your money, help you outpace inflation and protect against downward spikes in the stock market.
To get started, let’s discuss the different types of accounts you can open. The most common is either an Individual Retirement Account (IRA), or an employer sponsored 401(k) plan.
These plans are designed specifically to supplement your retirement. The money in the account cannot be touched until you reach age 59 1/2 or become disabled.
There are a few other instances when you can access your money (i.e. first time home purchase, financial hardship.) Due to these restrictions, the Internal Revenue Service (IRS) allows you to put your money in pre-tax and allows the interest to grow tax deferred until you begin taking distributions on the account. If you access the money prior to age 59 1/2, you are subject to a 10% penalty and income tax. Recently, the IRS has implemented Roth IRA, and Roth 401(k)’s. The plans allow you to put money in after income tax, grow tax free, and the distributions are taken tax-free.
Which one is right for you? In a vacuum a Roth is the better option. There are income restrictions on a Roth IRA. You cannot have an income more than $ 99,000 if you’re single, or $168,000 if you’re married. There are certain instances when contributing to a regular 401(k) or IRA can lower your income and thus place you in a lower tax bracket or increase your allowable deductions. If you meet the income restrictions, a Roth IRA or Roth 401(k) option is superior. ( Roth 401(k)’s are fairly new so many company plans do not offer them. Check with your employer or Human Resources Department to make sure a Roth 401(k) is an option.)
How much should I invest? Typically, I recommend to my clients to max out on the employer matching portion of their employer sponsored plan, and then maximize their Roth IRA ($5000 in 2008 subject to income limitations). If there is extra money to invest, max out the remaining portion of the 401(k) (15,500 in 2008). For instance, your employer matches your contributions 100% of the first 6% you contribute. I would recommend putting in the full 6% into the 401(k), then establish a Roth IRA. You can make automatic deductions from your checking account to the IRA.
How do I start an IRA? To start an IRA, you can go online through Fidelity or a Vanguard. Also, you can establish one through a financial advisor who can walk you through your investments choices. To establish online, there is a minimum $3000 investment at Vanguard, through an advisor you can start with as little as $25/month. (End)
Stephen Dopp is a Financial Services Representative and Investment Advisor Representative. He can be reached at 732-380-7203 or dopp16@yahoo.com
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