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 2008. If you are over 50 years old, you can contribute
an additional $1000 in 2008.
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.
