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Where to start investing?

March 04, 2019

I often get the question of how do I start investing?  My answer is to start by looking at what opportunities you may have through your job.  If your employer offers a retirement program, you will want to know if they match employee contributions.  When an employer matches an employee's contribution to their retirement plan, this is often referred to as free money.  You would not want to pass up on this opportunity.  If your employer matches your contribution dollar for dollar or $0.50 to dollar you should participate in the plan.  The employer will usually match employee contributions up to a certain percentage of employee compensation, maybe 3% or 5% of wages or salary.  The matching contribution will help employees accumulate more money in their retirement account faster than contributing without the matching contribution.  This is usually the best place to start when saving for retirement.  The most likely retirement accounts a person may have access to through an employer would include 403(b), 401(k), or Simple IRA.  

If your employer does not have a retirement plan or does not match your contributions, it is usually better to look elsewhere when investing.  The main retirement account an individual should consider outside of an employer sponsored plan is what is known as an Individual Retirement Account (IRA).  An IRA can help individuals save for retirement on either a tax deferred basis or an after tax basis.  Contributions to a Traditional IRA use tax deferral to lower your income in the year you contribute.  You will be able to defer paying taxes on your contributions and growth in the account until a maximum age of 70 and 1/2.  At age 70 1/2, an individual will need to begin withdrawing money from the account, and at that point in time it will become taxable income.  An individual that is in a higher tax bracket while working, and expects to be in a lower tax bracket after retirement, will benefit from the tax deferral that a Traditional IRA has to offer.  Be aware that if an individual is younger than age 59 1/2, there is a 10% penalty on distributions from Traditional IRA accounts.

If an individual is going to be in the same tax bracket or a higher tax bracket in retirement, that person may want to consider a Roth IRA.  A Roth IRA will allow a person to invest their money on an after tax basis.  Once the account has been open at least 5 years, and the owner has reached age 59 1/2, all distributions from the Roth IRA will be tax free.  The money you invest in this account was taxed in the year you invested the money, so you will not be taxed a second time when a distribution is made from the Roth IRA.  To me, the Roth IRA has the greatest benefit to young individuals or individuals in a low tax bracket.  You pay your taxes at the low rates, and in the future you do not owe any additional taxes as long as you meet the age 59 1/2 and account being open 5 year rules.  The best thing about the Roth IRA is that you can always take out the amount you contributed without taxes or penalty.  If you are under the age of 59 1/2 the Roth IRA avoids the 10% early distribution penalty because it is a return of contribution.  If you take a distribution greater than what was contributed, you would then run into the issue of taxation and penalty if under age 59 1/2.

Be aware that there are income eligibility issues to consider before investing in either a Roth or Traditional IRA.  To find out if you are eligible do a simple google search for IRA income eligibility.  Also for 2019, a person may only contribute up to $6,000 into IRAs and if over the age of 50 the total is $7,000.  These numbers are $5,500 and $6,500 for 2018.   These values are totals for IRA accounts and not on a per account basis.