Investment Strategies for Beginners
July 19, 2022
July 19, 2022
It’s never too early to start saving – and it’s never too late. That means no matter what your age or where you are in your career, if you haven’t started investing, now is the time. While there’s no “right” path to investment success, many new investors find a hierarchy helpful to decide how to invest their money. So here are some tips for beginners that shows how to potentially maximize tax benefits as you invest.
Step 1: Start with your 401(k)
Many people start with a 401(k) as part of a benefits package at work since those funds are considered “pre-tax” dollars, which means you don’t pay income tax on them.
Even if you don’t want to contribute the maximum amount you’re allowed, you may want to deposit at least up to your company’s “match.” This means your workplace offers to match a percentage of the amount you have contributed. For example, they might match $0.50 of every dollar you put in, up to 5% of your salary. However, it’s important to note that this money should be kept there for the long haul – if you withdraw funds before age 59 ½, you’ll owe a penalty plus the taxes you would ordinarily pay (except in certain circumstances).
Step 2: Consider an IRA.
If you’re able to invest in addition to a 401k, you could consider an individual retirement account (IRA).
There are two kinds of IRAs: A traditional IRA allows you to deposit money tax-free, much like a 401(k) plan, and then you will pay tax when you eventually make withdrawals. By contrast, a Roth IRA requires you to pay the taxes today and then withdraw your funds tax-free when you reach retirement age. That can be a benefit if you believe you may be in a lower tax bracket when you retire than you are today. Both types of IRAs are subject to deposit limits (in 2022 that limit is $6,000 if you are under age 50 while workers age 50 and older can put in an additional $1,000), and the Roth IRA also has income limits based on your tax filing status.
Since you’ve already paid taxes on the money in a Roth IRA, you can withdraw it any time, but with a traditional IRA, you’ll again have to wait until you’re at least 59 ½ to make withdrawals without incurring penalties.
Step 3: Choose other investment vehicles.
Another option is to invest in the stock market. While these investments don’t offer any tax savings, you can remove your money penalty-free any time you choose – however, you will be subject to capital gains tax on any gains you realize.
Common investment types include:
The decision about how much into the stock market and where you want to invest should be based on factors such as:
General investing tips:
If you’re interested in learning more about market conditions, be sure to check out our Market Commentaries here – a new one is posted each week. Lastly, it should be noted that this blog post is for educational purpose only and is not considered tax or investing advice. For more information on investment strategies, we at Valley Strong’s Retirement and Wealth Management Group are here to help you pursue your goals. Contact us today.