{"id":302,"date":"2022-03-28T21:20:49","date_gmt":"2022-03-28T21:20:49","guid":{"rendered":"http:\/\/www.1engineeronfire.com\/?p=302"},"modified":"2022-03-28T21:22:09","modified_gmt":"2022-03-28T21:22:09","slug":"start-investing-the-basics","status":"publish","type":"post","link":"https:\/\/www.1engineeronfire.com\/?p=302","title":{"rendered":"Start Investing – The Basics"},"content":{"rendered":"\n

Start Investing \u2013 The Basics<\/strong><\/p>\n\n\n\n

What is a 401-k, 403-b, IRA, Roth IRA or Brokerage account?  Where do I invest my saved dollars now that my budget is in order?  What choices should I make in my company 401-k?  I\u2019m maxing out my 401-k and wonder where to invest next.  How do I buy an index fund, stock or bond?  Like most things knowledge is power and you want your investments to be as powerful as possible!<\/p>\n\n\n\n

History of Retirement Accounts<\/strong><\/p>\n\n\n\n

Large companies like banks and railroad companies started offering pension plans near the turn of the 20th<\/sup> century.  The Internal Revenue Act of 1921 helped spur growth of pensions by offering an exemption for corporate contributions.  Labor unions pushed for pension plans and by 1950 about one half of private company workers had pensions.  Some of these plans started to fail and the government stepped in and the defined-benefit plan slowly gave way to the defined-contribution <\/strong>plan (401-k, 403-b, etc.).  Today\u2019s employee is likely not to have a defined-benefit plan (your father\u2019s pension) and needs to look after their own finances for retirement.<\/p>\n\n\n\n

Account types<\/strong><\/p>\n\n\n\n

Just like a simple bank savings account \u201cholds\u201d your cash a 401-k, IRA or Brokerage account holds your investments.  Each account has its own rules under the IRS tax code.  Many employees have access to an employer sponsored 401-k or 403-b account.  An IRA (Individual Retirement Account) is for any individual regardless if their employer offers a plan.  A brokerage account is a taxable account with no special retirement rules.  All these accounts are basically buckets to hold your investments.<\/p>\n\n\n\n

401-k, 403-b Accounts<\/strong><\/p>\n\n\n\n

401-k and 403-b get their names from their designation in the IRS tax code.  The 403-b account is essentially a 401-k but for non-profit organizations.  The key benefits<\/strong> to a 401-k account are 1) You invest with pre-tax dollars, 2) Funds grow tax free, 3) Employers often offer matching funds.  Primary drawbacks<\/strong> are 1) Withdrawals are taxed, 2) Withdrawals are penalized prior to age 59 \u00bd years of age (with few exceptions), 3) Contribution limits<\/p>\n\n\n\n

IRA Accounts<\/strong><\/p>\n\n\n\n

Founded in 1974 as part of the governments Employee Retirement Security Act (ERSA) the IRA was meant to offer tax-advantaged savings for employees who didn\u2019t have a pension and provide a tax-deferred account for terminated employees with qualified plans (rollover). Advantages<\/strong> 1) Funded with pre-tax dollars, 2) Tax free growth.  Disadvantages<\/strong> 1) Taxed withdrawals, 2) Withdrawals are penalized prior to age 59 \u00bd years of age (with exception), 3) Low contribution limit, 4) Phased out tax advantage based on income, 5) Required minimum distributions after 70\/72 years of age.<\/p>\n\n\n\n

Roth Accounts<\/strong><\/p>\n\n\n\n

To further complicate things there are Roth versions of both 401-k and IRA accounts.  The big difference is a Roth account is funded with post-tax money.  Advantages<\/strong> 1) Contributions can be withdrawn tax and penalty free after the account is 5 years old, 2) Funds grow tax free.  3) No required minimum distributions 4) Conversion provision from traditional IRA.  Disadvantages 1) Low contribution limit, 2) Phased out tax advantage based on income.<\/p>\n\n\n\n

Brokerage Accounts<\/strong><\/p>\n\n\n\n

A brokerage account is a bucket that holds cash and investments with no tax advantages.  Pros 1) No limits on contributions, 2) No limits on withdrawals.  Cons 1) No tax advantages.  A brokerage account can be held with a traditional advisor like Fidelity or Merrill Lynch or through an electronic account like e-trade or TD Ameritrade.<\/p>\n\n\n\n

Funding Order<\/strong><\/p>\n\n\n\n

So now you know the different buckets to hold your investments but which ones do you fund first?  If you have an employer 401-k with an employer match you should at least contribute enough to get the full match.  This is your best return on your investment dollar.  It\u2019s like getting free money!  If you have both a traditional 401-k and a Roth option I suggest you use the Roth if your income is low and income taxes are not a concern.  If you are in a high tax bracket you may want to use the traditional 401-k to reduce your tax burden.<\/p>\n\n\n\n

After you receive the full match or don\u2019t have a 401-k \/ 403-b I suggest funding a Roth IRA.  If you have saved enough to maximize the contribution limits of these accounts invest in your brokerage account.  Each account has limits and rules beyond the scope of this article but the internet offers all the details.<\/p>\n\n\n\n

Investment Selection<\/strong><\/p>\n\n\n\n

If you are a set-it and forget-it investor look for the index fund or balance fund choices in your employer\u2019s plan<\/strong>.  Index funds may be called total stock, S&P 500, Russel 2000, Dow Jones, etc.  A balanced fund will often have a retirement date like 2030, 2040 fund.  Or you can pick a balance of large cap, medium cap, small cap and international funds. <\/p>\n\n\n\n

The options for your IRA<\/strong> are almost infinite.  Since you are just getting started I suggest we just stick to Index funds.  It may seem too simple but a fund like Vanguards VTSAX of Fidelity\u2019s FZROX or FSKAX is all you need.  What matters most is you start investing now.  As you increase your investing knowledge you can easily change your asset mix.<\/p>\n\n\n\n

Let\u2019s Get Started<\/strong><\/p>\n\n\n\n

For your companies plan simply set a meeting with your Human Resources department.  Ask for all the information on their plan and any forms you may need to get started.  They will probably refer you to a website to get you set up.<\/p>\n\n\n\n

For an IRA go online and pick a broker.  I use Fidelity for my online accounts and I have a Merrill Lynch broker.  If I were starting over today, I would probably use Vanguard for my online account.  If you feel uncomfortable starting online call one of their 800 numbers and set up and appointment with an advisor. <\/p>\n\n\n\n

It\u2019s really that easy!<\/strong>  The online process will walk you through the steps to get started. <\/p>\n\n\n\n

Look at my Favorite Book post https:\/\/www.1engineeronfire.com\/?p=232<\/a> for investing ideas and for upcoming articles on picking funds that are right for you.<\/p>\n\n\n\n

1EngineerOnFIRE<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

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