Your employer offers you a 401k, and just for making earned income you are also allowed to participate in an IRA. Now, they are both retirement accounts and both work the same as far as taxes go. So, what are the pros and cons for each?
401k
Pros:
- Most employers will give you a match of what you contribute. For example, you may get a 100% up to 4% of your salary. So if you contribute $200 a month and it equals 4%, they will match that $200 every month.
- The 401k contribution comes out of your paycheck and is automatically deducted off of your taxable income.
- You can contribute up to $16,500 (for tax year 2009) if you are below 50, and up to $21,500 if you are 50 or older.
Cons:
- You are limited to the investment decisions you can make. Usually you will have a choice of five to twenty mutual funds and a stable value fund option. So, that means you can do a lot of stock market investing.
- You don't have an advisor tagged to that account who you can go to for advice, because this is a work-sponsored plan and you lose the ability to make money as efficiently as possible.
- If you withdraw money from the plan, the plan may withhold 20% for taxes upfront (most plans do this). Also, the plan may not allow any partial 401k withdrawals, it may make you withdraw everything. Remember that if you file for bankruptcy they cannot touch your retirement accounts, Do It Yourself Bankruptcy is a good resource to use in this situation.
IRA
Pros:
- Depending on the institution you use, you will be able to have every investment choice open to you (stocks, bonds, mutual funds, annuities, CDs, etc.)
- You will be able to pick an advisor who can give you detailed advice on what to do.
- You can take partial withdrawals from the plan, and you don't have to have any tax withheld upfront. However, you cannot take unsecured personal loans from your IRA account.
Cons:
- There is no match on your contributions, because it is not an employer plan, so what you put in yourself is what you have.
- The contribution limit is currently $5,000 for people under 50, $6,000 for those above. Also, the contribution may or may not be tax deductible, it depends on your income and how you file. If you make too much money it may not be much of a benefit to have an IRA. I would consult the IRS tax guidelines for IRA contributions.
Read more about 401k rollovers to an IRA
Conclusion: If you aren't sure about your 401k plan investments or generally enjoy investing, look into starting an investment club to learn more. 401k accounts are great for people still working, because you in the accumulation phase of your life. IRAs are great for people who are about to retire, because you are in the income/withdrawal phase and advice will be more important. Remember that when you leave an employer, you can rollover your 401k plan into an IRA or another 401k for no cost.
Choosing a financial advisor/broker
Ok. Some of you may have saved up a sum of money, won the lottery, or inherited a nice sum from a relative, and you ask yourself, "Now what do I do?"
Well, it's not as simple as you think and with anything to do with money, knowledge is always going to be power.
If you aren't knowledgeable enough about investments to pick your own, you will have to find a financial advisor/planner/broker (all mean and do the same exact thing). Or alternatively you can start an online savings account Don't worry, there are many people in your shoes.
I would recommend to interview three different brokers (one independent broker and two who work for firms) and ask them why you should let them manage your money. Do some research about the firms including any complaints and also google the advisors names to make sure they are legit.
Here are a list of questions to ask, in addition to the one in the previous paragraph:
1.) What kind of services will you provide me with that makes you unique from other brokers?
2.) What is the smallest (asset size) client you will except?
3.) What types of clients do you mainly deal with (estate planning, retirement, college savings, etc.)
4.) (after he recommends a strategy) How much do you make off of what we are doing today?
Most of you information will be had when he gives you his spiel. If he spends more time talking about his products and what they can do for you than asking questions about your life, run. If he recommends one product for all of your money, run. This means he is looking to make the most money and doesn't have your best interests in mind.
If, however he asks a lot of questions about you and provides you with investments that have low fees, are diversified, don't have a lot of rules or stipulations attached to them, you may have found a suitable person.
Always remember that a good advisor looks out for the interests of his clients first and usually the investment strategy that pays him the most will not be the most beneficial to the customer. Check out Tradeking Promo for more information on transferring your account to another broker who could save you more money.
In my next post I will give you a layout for smart investments strategies, which may help in your search for your next advisor.
Well, it's not as simple as you think and with anything to do with money, knowledge is always going to be power.
If you aren't knowledgeable enough about investments to pick your own, you will have to find a financial advisor/planner/broker (all mean and do the same exact thing). Or alternatively you can start an online savings account Don't worry, there are many people in your shoes.
I would recommend to interview three different brokers (one independent broker and two who work for firms) and ask them why you should let them manage your money. Do some research about the firms including any complaints and also google the advisors names to make sure they are legit.
Here are a list of questions to ask, in addition to the one in the previous paragraph:
1.) What kind of services will you provide me with that makes you unique from other brokers?
2.) What is the smallest (asset size) client you will except?
3.) What types of clients do you mainly deal with (estate planning, retirement, college savings, etc.)
4.) (after he recommends a strategy) How much do you make off of what we are doing today?
Most of you information will be had when he gives you his spiel. If he spends more time talking about his products and what they can do for you than asking questions about your life, run. If he recommends one product for all of your money, run. This means he is looking to make the most money and doesn't have your best interests in mind.
If, however he asks a lot of questions about you and provides you with investments that have low fees, are diversified, don't have a lot of rules or stipulations attached to them, you may have found a suitable person.
Always remember that a good advisor looks out for the interests of his clients first and usually the investment strategy that pays him the most will not be the most beneficial to the customer. Check out Tradeking Promo for more information on transferring your account to another broker who could save you more money.
In my next post I will give you a layout for smart investments strategies, which may help in your search for your next advisor.
Beginners guide to investing for retirement: The Basics
Retirement is a big goal for many of us. This is the reason why we put in all of the hard, long hours and save money. There is no easy or shortcut way around getting to that road easy (believe me if there were I'd be there!), so please be careful with your money. You owe it to yourself to invest smart and efficiently, and you don't have to be an expert either. I will lay everything out slowly and simply without using the technical jargon you may hear your advisor use. It does no good for you or for me.
Before we get on the road to saving for your future, lets go over my definitions of a few key terms you may or may not be familiar with.
Investing: Many people think this means buying a certain product (such as an annuity, mutual fund, etc.) or putting their money in the stock market. This is wrong. Investing means dedicating yourself to a particular strategy for a long term goal.
Investing Strategy: This is where your single components such as stocks, bonds, mutual funds, etc. come into play. Your strategy is dependent on your situation, and I will get into this in setting up your investment strategy for your situation.
Stock: This is partial ownership of a company. Whenever you buy a share of a company you own a piece of it. There are different types of stocks, which I will talk about in how investing in stocks is important for retirement.
Mutual Fund: This is a basket of different investments managed by a person or a team. There are thousands of different types of mutual funds and some types may invest in the stock market and some may not. It is important to know the differences and you can skip to how investing in mutual funds is important for retirement if you wish.
Bond: This is a debt obligation for a company. Think of it the basic way you get a loan but backwards. You need money for a certain purpose, so someone loans you the money and charges you interest. After a certain period of time you are required to pay the full amount plus the interest back. This is the same way a bond works except a company needs your money and in turn they will pay you interest and the money you gave them back after a set amount of time.
Annuity: These are retirement investments with some sort of guarantee. This guarantee usually means that you are guaranteed to earn 'X' amount of interest on your initial investment no matter what the market does. There are many other features they have, and can be very complex, but this is the most important piece to know. I get into annuities on the section how annuity investing is important for retirement.
Money Market: This is an investment similar to a cash position. These are generally safe investments where your principal will stay intact and you will earn a fluctuating amount of interest each day. Most money markets will let you access your money whenever you want to. Think of it like a checking account that earns interest. These are generally NOT FDIC insured.
CD (certificate of deposit): This is basically a bond issued by a bank that is FDIC insured in case the bank goes out of business. Therefore, they are very low risk investments and will guarantee the amount of interest you agree to for the term you purchase it for. (Ex. 3% for six months, 5% for 5 years, etc).
These are the first few terms that will be important in understanding the later posts. If you are not familiar with all of them please do so before going on to the more detailed content.
Next: A proven and good way to start saving money
Before we get on the road to saving for your future, lets go over my definitions of a few key terms you may or may not be familiar with.
Investing: Many people think this means buying a certain product (such as an annuity, mutual fund, etc.) or putting their money in the stock market. This is wrong. Investing means dedicating yourself to a particular strategy for a long term goal.
Investing Strategy: This is where your single components such as stocks, bonds, mutual funds, etc. come into play. Your strategy is dependent on your situation, and I will get into this in setting up your investment strategy for your situation.
Stock: This is partial ownership of a company. Whenever you buy a share of a company you own a piece of it. There are different types of stocks, which I will talk about in how investing in stocks is important for retirement.
Mutual Fund: This is a basket of different investments managed by a person or a team. There are thousands of different types of mutual funds and some types may invest in the stock market and some may not. It is important to know the differences and you can skip to how investing in mutual funds is important for retirement if you wish.
Bond: This is a debt obligation for a company. Think of it the basic way you get a loan but backwards. You need money for a certain purpose, so someone loans you the money and charges you interest. After a certain period of time you are required to pay the full amount plus the interest back. This is the same way a bond works except a company needs your money and in turn they will pay you interest and the money you gave them back after a set amount of time.
Annuity: These are retirement investments with some sort of guarantee. This guarantee usually means that you are guaranteed to earn 'X' amount of interest on your initial investment no matter what the market does. There are many other features they have, and can be very complex, but this is the most important piece to know. I get into annuities on the section how annuity investing is important for retirement.
Money Market: This is an investment similar to a cash position. These are generally safe investments where your principal will stay intact and you will earn a fluctuating amount of interest each day. Most money markets will let you access your money whenever you want to. Think of it like a checking account that earns interest. These are generally NOT FDIC insured.
CD (certificate of deposit): This is basically a bond issued by a bank that is FDIC insured in case the bank goes out of business. Therefore, they are very low risk investments and will guarantee the amount of interest you agree to for the term you purchase it for. (Ex. 3% for six months, 5% for 5 years, etc).
These are the first few terms that will be important in understanding the later posts. If you are not familiar with all of them please do so before going on to the more detailed content.
Next: A proven and good way to start saving money
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