We at The Motley Fool have always been champions of the individual investor, encouraging each person to take control of her or his financial destiny. In theory, the transition of America’s retirement apparatus from defined-benefit plans — i.e., pensions that pay a monthly amount — to defined-contribution plans — such as 401(k)s and 403(b)s — is consistent with this Foolish philosophy. The individual makes all the contribution, investment, distribution, and inheritance decisions, whereas with a defined-benefit pension, the worker has very little control.
However, for the majority of Americans, the transition away from defined-benefit has not been to their benefit. It requires each person to become an investing expert and financial planner in their spare time, and too many Americans don’t seem to have the time, interest, inclination, or skills.
According to the Employee Benefit Research Institute, the average 401(k) account is a tad over $60,000; those within a decade of retirement have a bit more, with an average balance of $78,000, but more than a third have less than $25,000. Almost half of workers (43%) between the ages of 45 and 54 reported they weren’t saving anything for retirement.
Not that traditional defined-benefit pensions don’t have their own problems. Many are underfunded, and the benefits accrue mostly to workers who stay with the same employer for many years, which is less common in today’s mobile workplace. But it’s clear that 401(k)-based retirement planning will result in not much of a retirement for many workers.
We can chalk a good deal of this up to people not taking responsibility for their finances, but the problem also lies with the 401(k) system itself. Employees are stuck with the plan and the investments that have been chosen by the employer and/or HR department (who may be fine people, but not necessarily investment experts). Too often, the fund choices are mediocre or worse, and the costs are high.
Get Ready to Look Under the Hood Unfortunately, you likely don’t know the true costs of your 401(k). They’re hidden in boring legal filings or embedded in the expense ratios of the mutual funds within the plan. But that’s all about to change.
Beginning later this year, 401(k) plans will be required to disclose how much the administration of the plan and the investments is costing participants. This is important information, since — according to human resources consultant Towers Watson — an increase of 0.5% of expenses (i.e., $50 for every $10,000 invested) could consume eight years’ worth of savings for an above-average earner. After all, the $30 billion to $60 billion the financial-services industry makes from 401(k)s each year doesn’t grow on trees; it’s usually taken directly from investors’ accounts.
The amount of fees being extracted from 401(k) accounts may be shocking to some investors. Indeed, many might be surprised they’re paying fees at all, if an AARP survey is to be believed, which found that 70% of worker didn’t know they were paying fees. Alas, that is just not the case.
With the new disclosures, it will be easier to see what you’re paying, and whether that’s too much.
Generally, smaller plans pay higher costs — “smaller” meaning both the number of plan participants as well as total assets in the plan. According to a study [PDF] conducted by Deloitte for the Investment Company Institute (a trade organization for the mutual fund industry, so not necessarily an unbiased crew), the median all-in cost — which includes administrative costs as well as investment expenses — to plan participants in 2011 was 0.78%. But the numbers vary widely, with plan size being the primary factor.
The median cost for a plan with more than $1 billion in assets was 0.38%, whereas the median cost for a plan with less than $1 million was 1.41%. Similarly (and relatedly), the median cost for a plan with fewer than 100 participants was 1.29%, compared to 0.43% for those with more than 10,000 participants.
You can use those figures as a benchmark to determine where your fees fall in relation to other plans. Then, figure out who’s paying those fees — you or your employer. Chances are, it’s the person you see in the mirror (unless your boss follows you into the bathroom, which is kinda weird). According to the Deloitte study:
[P]articipants bear the majority of 401(k) expenses. Similar to any other employee benefit (e.g., health insurance), the employer determines whether the employee, employer, or both will pay for the benefit. According to the Survey, on average, participants pay 91% of total plan fees while employers pay 5% and the plans cover 4%. This compares with participants paying 78%, employers paying 18% and plans paying 4% in the 2009 Fee Study.
In other words, employees are paying the majority of fees, and the share that they’re paying is going up.
Are you getting your money’s worth from your 401(k)? Here’s how to find out, and what to do about it:
Evaluate your investment choices. See if the funds in your plan, over the past five years, have beaten a relevant index fund as well as the majority of other funds with a similar investing objective. This information may be found in your quarterly statements or on the website of your plan provider. Important note: Your funds’ mileage may vary from the information on Morningstar or other fund-info sites since funds in 401(k)s often have additional costs.
Use the side brokerage account, if offered. Approximately 20% of 401(k)s allow participants to open an account with a discount brokerage within the plan. This will let you buy individual stocks, bonds, ETFs, and other mutual funds. However, compare the benefits to the costs, since these accounts often have higher maintenance fees.
Advocate for a better plan. Talk to the folks in your HR department and raise your concerns. After all, their retirement is on the line, too, and they should also be motivated to have the best possible plan. Here’s an example of a letter you can write to ask for a better plan.
Don’t ignore other accounts. If your 401(k) is stin(k)y, contribute just enough to take full advantage of the employer match, and then max out an IRA with the discount brokerage of your choice. You might pay lower costs and have more investment options. However, if you are in a higher tax bracket — and thus ineligible for the Roth IRA, and your contributions to a traditional IRA wouldn’t be deductible — then it might make sense to invest in non-dividend-paying stocks you’ll hold for many, many years. You don’t get a tax break up front, but you’ll pay long-term capital gains when you do sell, which (at least according to current laws) are lower than the taxation rate on ordinary income (the rate at which your paycheck and traditional 401(k) and IRA distributions are taxed).
Move your money. You generally can’t transfer the money in your 401(k) to another account while you’re still working for the employer sponsoring the plan, but some companies allow it, especially for older workers. If your plan is sub-par, ask if your employer allows “in-service distributions.” If so, or once you leave that employer, transfer the money to an IRA. But do not just get a check and cash it; that is considered a distribution, which will be subject to taxes and a 10% penalty if you’re not 59 ½ years old. Instead, get the money to an IRA, ideally through a “trustee-to-trustee transfer,” in which the money is sent directly from your 401(k) to the IRA.
Get help. If you’re looking for professional advice with your investment choices, look for a fee-only planner who charges by the hour, such as the Certified Financial Planners at the Garrett Planning Network or the National Association of Personal Financial Advisors. She or he can also estimate whether you’re saving enough to retire when and how you want.
Hug Your Boss, Then Make the Request Employers deserve credit for sponsoring retirement plans. They don’t have to do it, it consumes the HR department’s time, and it might even cost them actual money. I’m on the 401(k) committee of The Motley Fool (where the company covers all administrative costs, thank you very much), and I can tell you that it’s more work than most people would think.
But don’t be bashful about politely asking for a better plan. No one is planning your retirement for you, and no one cares more about your retirement more than you do. The more your retirement will rely on your own contribution and investment decisions, the more you must take charge.
By Contributing Author10 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited May 20, 2013.
The Roth IRA (and its cousin, the Roth 401k) are getting press lately and with good reason. There is a fear that taxes will need to rise over time and we will all find ourselves retiring in a higher tax bracket than we are in today.
Let’s first take a step back to understand what these account are and how they work.
What Is An IRA, And How Does It Work?
A traditional IRA account or 401(k) account allows you to deposit money into an account prior to having it taxed. If you are in the 25% bracket ($67,900 taxable for married filing joint or $33,950 filing single) you can put $5000 into the IRA ($6,000 if you’re over 50 this year) or you can pay $1,250 in taxes and clear $3,750.
With the introduction of Roth a number of years ago, you have a new choice, to pay the taxes now, clearing that $3,750 and after depositing into the Roth account (or Roth 401(k) where the limits are $16,500 or $22,000 if 50 or older) and not paying any taxes when you withdraw these funds at retirement.
At some level this is a simple choice, pay tax now or pay it later. Let’s think about this a moment. Do you know your current marginal rate? Do you know what “marginal rate” means? A simple way to look at this is that your marginal rate is the (federal) tax you’ll pay on the next $100 of taxable income. You may make over $80,000 and see that your taxes aren’t quite $10,000, but the next $100 is taxed at 25% or $25. An important distinction to understand. Fairmark offers a nicely presented chart to see marginal rates, it’s important that you understand this concept before making any decisions. Knowing your current marginal rate is easy, projecting what it will be at retirement, not so easy. It’s this ‘not knowing’ that may prompt you to go one way or the other, but there are steps you can take to improve your decision process.
When To Put Into A Roth IRA
At the beginning of your career (and younger, if you are working as a teen), there’s a good chance you are in the 15% bracket. Now is a good time to put some money away in Roth accounts.
As your salary increases, you are likely to take on a mortgage, and perhaps start a family. This gives you deductions for the mortgage as well as the additional exemption (and perhaps earnings) of your spouse. If despite that, you are in the 25% bracket or higher, I’d suggest using pretax savings, the traditional 401(k) and IRA accounts. Now is the time in your life to learn to project out what your retirement will look like. Are you on track to have $2 million dollars in pretax accounts? If not, continue to save pretax. Why $2 million? A conservative withdrawal rate is about 4%/yr. This results in $80,000/yr upon retiring, and right now that will put you toward the top of the 15% bracket. Also, keep in mind that few people work 40 years with no break or disruption to their income. Use these disruptions (times you will drop into a lower bracket) to convert funds from a traditional IRA to a Roth, in essence “filling up the bracket” just enough to top it off but not go into the next.
Last, toward the end of your working career, the decision becomes very simple. With retirement only a few years away, you should be able to calculate what your marginal rate will be after you retire. If the same or higher, go with Roth, if it will be lower, go with traditional.
Once retired, continue to take advantage of the Roth conversion option. In 2009 a married couple can have $86,600 in gross income and still be in the 15% bracket. If they are withdrawing say $40,000 per year from pretax accounts, they should consider converting right up to the $86,600 figure and pay the 15%. This money will never be subject to RMDs (required minimum distributions) and when you pass, your heirs will not have to pay income tax on the withdrawals as they would from a traditional account. This also will help you avoid that higher 25% bracket as the equation to calculate your RMD continues to force you to take a larger portion of your account out each year.
Are you currently taking advantage of a Roth IRA? Why or why not? What types of retirement accounts are you investing in and why? Let us know in the comments!
This is an article by Joe from JoeTaxpayer.com. Stop by his site and subscribe to his feed for more great articles!
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Investing in stocks can seem like a daunting task.
There are so many things to consider when it comes to investing, and the stock market is constantly moving.
Stock market investing is a popular option to increase net worth and make money.
Many people are looking for ways to invest their money, with the number of individual investors increasing rapidly in recent years.
This guide covers many important factors for how to invest in stocks for beginners.
Starting out as a newbie trader can be scary and overwhelming… don’t worry, all seasoned traders had to start at the beginning too!
Let’s take away that quell those thoughts and focus on why you want to learn to invest in stocks.
This guide will give you everything you need to know about how to invest in stocks as a beginner investor!
What Are Stocks?
In the most basic form, stocks are a form of investment. When you own a stock, you have a piece of ownership in the company’s equity.
The stock market is a real-time financial market in which investors buy and sell stocks and other securites. The stock market is made up of many companies and individuals who are actively investing in stocks.
Stocks are an excellent way for companies and individuals to invest in a company and receive a share of the company’s profits.
Many of the growth stocks (FAANG stocks) are those who investors want their stock price to increase over time. Thus, increasing their overall portfolio’s net worth.
FAANG Stocks is an acronym for: Meta (formerly known as Facebook), Amazon, Apple, Netflix, and Alphabet (formerly known as Google).
Some companies like Chevron (CVX) pay out a dividend each quarter to their investors.
There are thousands of stocks available to trade.
What Can You Invest In The Stock Market?
There are many investment opportunities in the financial market, so it is important to be informed about what you can invest in. Below are some of the places where you can invest your money:
Stocks
Bonds
Mutual funds
ETFs
Commodities
Futures
Options
Now, we are going to look at the most common.
Individual stocks
Individual stocks are a type of investment that you can make yourself.
You can choose how many shares of a certain company you want to purchase.
For example, you like Tesla for how they are innovative in the electric car space. You can choose to invest 20 shares of their stock.
As a long-term investor, you want to hold a portfolio of 10-25 stocks. Find a list of beginning stocks to build your portfolio.
Individual stocks can be bought or sold as a way to dip your toe into the stock-trading waters.
As a short-term investor, you are looking to make money as the stock price increases or decreases.
Mutual Funds
Mutual funds are managed portfolios of stocks.
As a result, mutual funds typically have load fees equal to 1% to 3% of the value of the fund.
One of the most popular mutual funds is VTSAX because of its expense ratio is .04%
Mutual funds are a clear choice for most investors because of the simplicity to invest in the market. This can be a good investment for both novice and experienced investors, as they offer decent returns with lower risk.
They tend to rise more slowly than individual stocks and have less potential for high returns. Mutual funds are a great way to diversify your portfolio and gain exposure to a variety of different securities.
All mutual funds must disclose their fees and performance information so that you can make an informed decision about whether or not to invest.
Exchange traded funds (ETFs)
Exchange traded funds (ETFs) are a type of exchange-traded investment product that must register with the SEC and allows investors to pool money and invest in stocks, bonds, or assets that are traded on the US stock exchange.
They are inherently diversified, which reduces your risk.
This is a good option for beginner investors because they offer a large selection of stocks in one go.
ETFs have a lower minimum to start investing, which is a draw for many investors starting out with little funds. Plus there are many different types of ETFs to choose from.
ETFs are similar to mutual funds, but trade more similarly to individual stocks. With ETFs and Index Funds, you can purchase them yourself and may have lower fees.
Why Stock Prices Fluctuate
Stock prices fluctuate because the financial markets are a complex system. There are many factors that can affect the price of a stock,
There are a number of factors that can influence stock prices, including:
Economic indicators like GDP growth, inflation, and unemployment rates
Company earnings reports
The overall health of the economy
Political and social instability
Changes in interest rates
War or natural disasters
Supply and demand,
Actions of the company’s management
Short squeezings like what happened with GME or AMC
The volatility in the stock market is the #1 reason most people stay out of investments. However, on average, the stock market has moved up 8-10% a year.
What is the best thing to invest in as a beginner?
The best thing to invest in as a beginner is your time.
You need to learn how the stock market works. Just like you would get a certification or degree, you should highly consider an investing course.
Learn and devote as much time as you can to investing in stocks.
How To Invest In Stocks For Beginners?
Investing in the stock market can be a great way to make money! If you’re looking for ways to make money or grow net worth, investing in a stock is a smart choice.
With online access and trading being easier now than ever, it can be easier than ever to start buying stocks.
Let’s dig into how to invest in stocks like a pro.
FYI…You should do your own research before investing.
Step #1: Figure out your goals
Figure out your goals to help with setting an investing strategy.
What are you trying to achieve with stock market investing? Is it supplemental income? A certain level of wealth for retirement? Are you looking for short-term or long-term gains?
Once you know what you’re aiming for, it will be easier to find the right stocks and make wise investment decisions.
Your reason to invest in stocks will be different than everyone around you.
Some people want to supplement their weekly income.
Others want to invest in companies for the long term.
My goal is to make weekly income from the stock market. That is my investment strategy for non-retirement accounts.
You need to spend time understanding WHY you want to buy stocks.
Knowing this answer will help you define what type of trader you will be.
Step #2. Decide how you want to invest in the stock market
When you decide to invest in the stock market, you need to choose what you want to invest in.
You can invest in stocks, which are shares of ownership in a company, or you can invest in bonds, which are loans that a company makes. There are also other options like mutual funds and exchange-traded funds (ETFs), which are collections of stocks or bonds.
Also, you can expand this to what types of investments will you have in various retirement or brokerage accounts. For example, you may invest in mutual funds with your 401k, ETFs with your Roth IRA, and stick with individual stocks for your taxable account.
This is a personal decision.
Many people when they are first starting to trade stocks choose to limit purchasing stocks with a limited percentage of their overall portfolio.
Step #3. Are you invest in stocks for the short term or long term?
The buy and hold investor is more comfortable with taking a long-term approach, while the short-term speculator is more focused on the day-to-day price fluctuations.
Once again, this is a personal preference.
One of the most common themes of many investing gurus is, “Remember that stock prices can go down as well as up, so it’s important to stay invested for the long term.”
However, this full-time trader wants to make money on those highs and lows.
Knowing your overall investment horizon will help you decide how much time you plan to hold onto your investments to reach your financial goal.
Also, you can choose different time horizons for different accounts.
Step #4: Determine your investing approach
Passive and active investing are two main approaches to stock market investing.
Passive investing does not involve significant trading and is associated with index funds.
Passive investing is a way to DIY your investments for maximum efficiency over time.
Thus, you would contribute to your investment account on the xx day of the month with $xx amount of money.
This happens with consistency regardless of where the market stands on that day.
You are less warry of where the stock market will go and focused on overtime it will continue to go up.
Active investing takes the opposite approach, hoping to maximize gains by buying and selling more frequently and at specific times.
Active investing is when an investor is actively acquiring, selling, or holding bought stocks.
This could be with day trading or swing trading.
You may hold stocks for less than a day, a few days, or a couple of weeks.
The purpose of having active investing is to make profits.
In the stock market, investors make efforts to increase their net worth over time or to make income off the market.
Step #5: Define your investment strategy
When it comes to investing in the stock market, there are a few key factors you need to take into account: your time horizon, financial goals, risk tolerance, and tax bracket.
Do you want to be an active trader or stick with passive investing? What kind of investor am I?
There is no right or wrong answer as this is a personal preference.
Ultimately, you want returns to be greater than the overall S&P 500 index for the year.
Once you’ve figured these out, you can start focusing on specific investment strategies that will work best for you.
Be aware of any fees or related costs when investing. Fees can take a bite out of your investments, so compare costs and fees.
Step #6: Determine the amount of money willing to lose on stocks.
Trading stocks online is inherently risky.
You want to consider what your “risk tolerance” is. Simply put, how much are you willing to lose in stocks before you want to quit?
The biggest reason most people quit trading stocks is that they do not know their risk tolerance and fail with risk management.
You will lose on trading stocks. The goal is to lose a small amount on some of the trades and gain a greater amount of more of your trades.
How much risk you can reasonably take on given your financial situation?
What are your feelings about risk?
What happens when your favorite stock drops 25%?
Understanding your risk tolerance and how much you are willing to lose will help you keep your losses small.
Start with a small amount of money when investing in stocks. Also, make sure you have enough money saved up so you can handle any losses that may occur.
How to Start Investing in Stocks
There are a variety of ways to start investing in stocks. Some methods include getting a small account balance and then buying shares, creating an investing club with friends, or researching the companies you want to invest in.
Now, that you have determined how and why you want to invest in stocks. Let’s dig into the nitty gritty of how to manage a stock portfolio.
On the other hand, if you don’t invest enough, you could miss out on potential profits. Try starting with an amount you’re comfortable losing if the stock market does go down.
1. Open an investment account
There are a few things you need to do in order to start investing in the stock market.
The first is to open an investment account with a broker or an online brokerage firm.
There are different types of accounts you can open:
Taxable accounts like an individual or joint brokerage
Retirement accounts like IRA or Roth IRA
These are the most basic investment accounts, here is a list of types of investment accounts.
If you plan to hold EFTs or mutual funds, Vanguard is a great place to start.
If you plan to be an active trader, I would look at TD Ameritrade or Fidelity. Be wary of Robinhood or WeBull.
2. Saturate yourself in Stock Market Knowledge
On the simplest level, it can be incredibly easy to begin your investing career with little-to-no knowledge, research, and expertise.
If you have even a remote understanding of stocks, then learn what you need from an easy-to-find YouTube video, followed by watching some of your favorite TV shows to learn more about the market and its secrets.
With that said, you need to be digesting the basics from start to end of getting your first investment started.
As the title reveals, investing can seem intimidating and complicated. Thus, stock market knowledge is invaluable.
3. Consider an Investing Course
A typical investing course would teach how to invest in stocks (and possibly other investments).
As a beginner trader, it is unlikely you will know the full extent of how the stock market works. There are many intricacies you must learn and understand.
Beginners should learn about stock investing basics, such as diversification and investment criteria.
Many investing courses offer a platform on how to make money by trading stocks.
Personally, I highly recommend buying this investing course.
If you choose not to follow my advice, that is fine. Come back when you have lost more money in the stock market than the price of the courses.
I CAN NOT STRESS ENOUGH… how important it is to have a solid foundation and practice in a simulated account before you use your real money.
4. Research the companies you want to invest in
When you’re ready to start investing in stocks, it is important that you do your due diligence and research the companies you want to invest in.
Look for trends and for companies that are in positions to benefit you.
Consider stocks across a wide range of industries, from technology to health care. It’s also important to remember that stock prices can go up or down, so always consider this before making any investment decisions.
5. Choose your stocks, ETFs, or mutual funds
Next, you have to decide what fits your investing strategy. Are you looking to buy:
Stocks
ETFs
Mutual Funds
Regardless of which type of investment you make, you must look for companies that have attractive valuations and growth prospects. In the case of index funds or ETFs, which fund has the companies you find attractive.
Most importantly, you should also take into account the company’s financial health and its prospects for future growth.
Make sure you understand the risks associated with holding a particular stock, including possible price fluctuations and loss of value.
7. Take the Trade
This is the hardest step for most people is to take their first trade.
Thus, why learning to trade stocks is great to learn a simulated account using fake money. Then, move to a LIVE account using your real money.
At some point, in your investing in stocks journey, you must press the buy button.
For many the investment platform may be overwhelming to use, so check out your brokerage’s YouTube videos to help you out.
8: Manage your portfolio
Managing your portfolio is important to keep your investments in good shape.
If you are a long-term investor, diversify your portfolio by investing in different types of investment vehicles and industries.
If you prefer to swing trade or day trade, then you want to make sure you always have cash on hand and are rotating your portfolio to take profit.
Investing can be difficult for beginners who often lack knowledge about the stock market.
It is important to remember to keep investing money and rebalance your portfolio on a regular basis. This will help ensure that you stay on top of your investments and achieve the desired result.
9. Selling Stocks
For most investors, it is harder to sell their stocks than to purchase them. There are a variety of factors for that. But, you must sell your stocks at some time to realize your gain.
Don’t panic if the market crashes or corrects – these events usually don’t last very long and history has shown that the market will eventually rebound. Most people tend to panic sell when stocks are low and FOMO buy when the market is at highs.
When you are ready to sell, aim to achieve a percentage return on your investment.
This will require some focus on your time horizon and the stocks you want to invest in.
Also, you need to consider any taxes that may be owed on the sale of stock.
If you’re new to stock investing, consider using index funds instead of individual stocks to gain broad market exposure.
10. Journal & Analyze your Trades
Journaling is a way of recording the important decisions you make during trading to help yourself remember what happened in your trades. It can be used as a tool for reflection, learning from mistakes, and reviewing your strategy.
Analyzing your trades means looking back on your trading history with the goal of improving it.
This is the most overlooked step of the investing process.
When it comes to buying and selling stocks, journalling what is happening in the market is an important part of being a successful investor.
Stock Market Investing Tips for Beginners
Ask any seasoned trader, and they will have a list of investing tips for beginners.
They have made plenty of trading mistakes they do not want to see newbies do the same thing.
When starting to invest in the stock market, beginner investors often seek out consistent and reliable investments.
This allows them to slowly learn about the stock market and take calculated risks while also earning a return on their investment. Over time, as they gain experience, they can expand their portfolio to include riskier but potentially more rewarding stocks.
1. Invest in Companies That You Understand
An investor should know the company they are investing in and have an idea of what type of return they expect.
When you are starting out, it is best to invest in stocks of companies that are easy to understand and have a proven track record.
Do NOT invest in stocks based on the advice of friends, what you read in the news, or on a whim – these can be risky moves. Be wary of the popular stocks you can find on the Reddit Personal Finance threads.
2. Don’t Time the Market
In the world of investing, there is one rule that no investors should ever break: do not time the market.
By following this rule, you will always be on top of your investments and will be able to reap the rewards.
There are times to buy stocks and sell stocks. This is something you will learn when investing in a high-quality investing course.
As an average investor, trying to time the market will leave you frustrated by your minimal returns or great losses.
3. Avoid Penny Stocks
Penny stocks are the lowest-priced securities on the market, and they don’t offer any significant upside potential to their investors. While you may hit a home run return on some, many penny stocks tend to trend sideways.
The risk is not worth the return.
If you plan to invest in stocks, avoid penny stocks and focus on healthy companies.
4. Consider Buying Fractional Shares
Fractional share investing lets investors buy less than a full share at one time. Many times, you may not be able to afford the price of a full share.
For example, buying a share of Amazon (AMZN) may cost you upwards of $2800 or more. Thus, you can invest a smaller amount with a fractional share.
You would have to check if your brokerage company allows the purchase of fractional shares.
5. Stay the Course
In order to be successful, a trader must stay the course and maintain their focus. By staying focused, they will have less chance of making mistakes that may lead to big losses or overtrading.
When you’re starting out in the stock market, it’s important to be disciplined with your buying. Don’t try to time the market, because you’re likely to fail. Instead, buy shares over time and stay the course.
That way, you’ll be more likely to see a profit in the long run.
6. Avoid Emotional Trading
In order to be successful in the stock market, you have to maintain a level head.
Responding emotionally will only lead to bad decision making. Instead, stay the course and trust your research and analysis.
Know your weaknesses as well as your strengths.
7. Do Your Research
When you’re ready to start investing in the stock market, it is important to do your research so you can make informed decisions.
There are a lot of stocks to choose from, and it can be tempting to invest in them all.
But remember, you don’t want to spread yourself too thin. Invest in stocks that you believe in and that have a good chance of making you money.
8. Build Wealth
Stock market investing is one of the best ways to grow your money over time.
For long-term investing, you buy stocks in companies and hold them for a period of time, typically years. Over time, as the company grows and makes more money, so does your stock. This is one of the most common ways to build wealth over time.
The other way with short-term investing is to consistently take profit and grow your account over time.
Stock investing FAQs
Here is a list of the most common questions and answers on stock investing.
Q: What is the difference between investing and trading?
Trading is buying or selling financial products with the goal of making a profit. This is normally a day trader or swing trader.
Investing, on the other hand, refers to the process of putting money into an investment with the hope that it will grow. Someone who is focused on the long-term.
Q: Do you have to live in the U.S. to open a stock brokerage account?
No, you do not have to live in the U.S. to open a stock brokerage account. You must find a brokerage company in your area of residence abroad.
Q: How much money do I need to start investing?
The very common question of, “How much should you invest in stocks first time?”
It is recommended to start investing with $500 or more. However, you can start with Acorns with as little as $5.
Check out this investor’s story by starting with a small account of $500 and growing it over $35k in less than 6 months.
It is best to grow your account with your growth or profit.
Q: Do I have to pay taxes on the money I earn from stocks?
Yes, you will be required to pay taxes on the money you earn from stocks.
Q: What are the best stocks for beginners to invest in?
The best stocks for beginners to invest in are those that have a history of staying consistently on an uptrend. These companies’ stock prices have typically risen over the course of the year.
Find a list of beginning stocks to build your portfolio.
Q: How do beginners buy stocks?
Above, we outlined this in detail. In order to buy stocks, there are a few different steps that you should follow in order to maximize your chances of success.
The first step is making sure you have an account. Once you have an account, the next step is to decide which stocks you want to invest in. Then, you must buy your stock. Finally, you must decide when you want to sell your stock for a realized gain or loss.
Q: How many stocks should you own?
The best answer is it depends on your investing strategy.
As a short-term investor, you can only manage a smaller number of trades.
As a long-term investor, you need a more well-rounded portfolio. of15-25 stocks.
More likely than not, the short answer is “as many as you can afford.”
Q: What is the best thing to invest in as a beginner?
The best thing to invest in as a beginner is an index fund.
Indexes are great because they diversify across many different types of investments and don’t require much effort on the part of the investor to maintain. Index funds are also less risky than other investments, especially in the beginning stages of an individual’s investing career.
Q: How do we make money?
Traders make money in many ways. They can trade stocks, bonds, futures, and options on equities. They can go long when the market goes up and short when the market goes down.
Traders also use trading systems that are usually automated to manage the trades they make to maximize profit.
Trading is a risky investment and it’s not uncommon for traders to lose money. In order to keep losses small, many traders use the trading strategy based on minimizing risk in order to get the desired return.
Learn how fast you can make money in stocks.
Q: Why is Youtube Option Trading So Popular?
Video on how to trade options is very popular on Youtube. This is because of the high volume of interest on this topic.
For many people, learning options is an advanced strategy that takes more time and knowledge to learn.
This is my favorite youtube option trading channel as well as an overall investing strategy.
Additionally, traders are able to get a much higher return on motion trading versus going long or short on stocks.
Q: What is volume in stocks?
Volume is a measure of the number of shares traded in a given period, usually trading days.
This is an important metric if you plan to exit your trade to know there are enough buyers to buy your stock.
Q: How to invest in penny stocks for beginners?
Penny stocks are shares of a company that typically trade for less than $5 per share, which is also known as penny stock trading.
Investing in penny stocks can be a lot of fun and the highest risk, and there are many ways to get involved. For anyone who is new to the world of investing in penny stocks, it can be intimidating to know where to start.
However, there are a few things that you should keep in mind before diving into the world of penny stocks. One of these is researching what types of companies you want to invest in. Many of these penny stocks are not healthy companies and burning through cash.
It is important to always be careful when investing in penny stocks. Keep in mind that the risk of losing money is high and you should invest only what you are willing to lose.
Q: How to invest in stocks for beginners robinhood?
Robinhood is a stock brokerage company that allows users to invest in stocks without paying any fees. It also provides real-time quotes and charts. To invest, the user must have an account with Robinhood that holds at least $0.
Most major brokerage companies have zero commission fees on trading stocks as well.
Beware, Robinhood is known for stopping to trade various stocks during times of volatility whereas other’s brokers do not.
Q: What is a good price to buy at?
This is a hotly debated question as every investor sees the market from their view.
More often than not, people wonder the best time to buy stocks.
As such, you can read is now a good time to buy stocks?
Ready for Stock Market Investing?
If you are new to investing in stocks, there are a few things you take into consideration before diving into the market.
For starters, it is important to understand how stock markets work. You should also know the difference between a stock and an investment.
Investing in stocks can be a bit complicated, but this guide walked you through the basics of how to invest.
Before you invest in stocks, it is important that you understand your investment strategy. That way, you can make informed decisions about where to put your money and how much risk you are willing to take on.
Most people shy away from learning how to actively trade stocks because of the movies about Wall Street they have watched.
You will get a deeper understanding of investing in stocks the longer you educate yourself on the concept.
Overall, it is wise to diversify your portfolio and don’t put all your eggs in one basket.
So, what is your next move to start investing?
One of the best ways to improve your personal finance situation is to increase your income.
Here are the best investing courses to guide your path. With time and effort, you can start enjoying the lifestyle you want.
Learn how to supplement your daily, weekly, or monthly income with trading so that you can live your best life! This is a lifestyle trading style you need to learn.
Honestly, this course is a must for anyone who invests. You will lose more in the market than you will spend this quality education – guaranteed.
Read my Invest with Teri Review.
Photo Credit:
studentloanplannercourse.com
Learn how to reach a six figure net worth in 5 to 10 years, even if you have a massive amount of student loans.
This beginning investment course will help you pay off debt and start your path to six figures.
After taking a second job as a driver for Amazon to make ends meet, this former teacher pivoted to be a successful stock trader.
Leaving behind the stress of teaching, now he sets his own schedule and makes more money than he ever imagined. He grew his account from $500 to $38000 in 8 months.
Check out this interview.
Know someone else that needs this, too? Then, please share!!
By Peter Anderson7 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited January 22, 2010.
A couple of months back the IRS released their 2010 Traditional and Roth IRA contribution limits. It’s important to keep an eye on those limits year to year if you’re contributing to one of these account types. As was expected the 2010 Traditional and Roth IRA contribution limits remain the same for the coming tax year.
2010 Traditional And Roth IRA Contribution Limits
The Traditional and Roth IRA contribution limits for the 2010 tax year are $5,000 for those under the age of 50. If you’re over 50 you have the option of making catch up contributions to your account, which brings your limit to $6,000.
It’s important to remember that you can contribute to both a Roth IRA and a traditional IRA in the same year, but you can’t go over your limit ($5,000-$6000) when you combine the two accounts. So if you were under 50, and contributed $2500 to a Roth IRA, you would only be able to contribute up to $2500 to your Traditional IRA.
Here’s a table showing the 2010 Traditional and Roth IRA contribution limits, along with the limits in years past.
Year
Age 49 and Below
Age 50 and Above
2002-2004
$3,000
$3,500
2005
$4,000
$4,500
2006-2007
$4,000
$5,000
2008-2012
$5,000
$6,000
2013-2018
$5,500
$6,500
2019-2022
$6,000
$7,000
2023
$6,500
$7,500
2010 Traditional And Roth IRA Phase Outs Based On AGI
Traditional and Roth IRAs have phase outs if you reach certain compensation limits. Single filers with an annual Modified Adjusted Gross Income (MAGI) over $105,000 begin to see their contribution limit drop until at $120,000 it goes away completely. The limits for Married Filing Jointly investors are $167,000-$176,000.
IRA Type
Single
Married Filing Jointly
Roth IRA
$105,000 – $120,000
$167,000 – $177,000
Traditional IRA
$55,000 – $65,000
$89,000 – $109,000
Contribute To Your Traditional Or Roth IRA Until April 15th
If you haven’t already contributed the full amount to your Traditional IRA or Roth IRA for the 2009 tax year, keep in mind that you can still open a Roth IRA and contribute to the accounts up until tax day, April 15th, 2010. If you do make a contribution in 2010 before tax day, be sure to specify which tax year the contribution is being made for.
Differences Between Roth IRA And Traditional IRA Accounts
The main difference between Traditional IRA and Roth IRA accounts is how they are looked at for tax purposes. Traditional IRA account contributions are made with pre-tax money. Because of that your distributions will be taxed in retirement. Roth IRA contributions, however, are made with dollars that have already been taxed. Because of that the money will grow and not be taxed at withdrawal. For a complete look at choosing between retirement accounts, check out this article: Choosing Between 401k, Traditional IRA, Roth IRA.
Do you currently have a Traditional IRA or Roth IRA? Are you contributing to the limit? Which account type do you prefer? Tell us your thoughts in the details.
By Peter Anderson3 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited February 28, 2013.
Assuming you are investing for future retirement, you should seriously consider the Roth IRA (Individual Retirement Account). I am already a huge fan of the Roth, but as the national debt increases with each federal bailout, the Roth is looking better all of the time. Let me explain why.
Save Taxes on Down The Road With The Roth IRA
With the traditional IRA, you get to deduct the contribution for the tax year it was made, but you will pay taxes when you start drawing the money out for retirement. So whatever your tax rate is in retirement, that’s what you’ll be paying.
The Roth, on the other hand, is purchased after you have paid your taxes and is therefore tax free when withdrawn. Nothing like getting tax free withdrawals in retirement and not having to worry about paying taxes, right?
When deciding which one is best for you, conventional wisdom is that if you believe you will be in a lower tax bracket when you retire, you are better off with the traditional IRA. Why? Because you were able to claim a tax deduction at a higher percentage, but pay those taxes later at a lower percentage.
Will Tax Rates Get Cheaper?
But I ask you: do you seriously believe that the tax structure when you retire will be essentially the same as it is today? Is it possible that even if your retirement income is less than your working income, your tax rate could be higher than it is today?
I just don’t see how we can ever pay down our $10 trillion national debt without hiking taxes. My longhand math (calculators don’t have that many zeroes) indicates that we owe $30,000 for every man, woman and child in America.
To compound the problem, the Social Security Trust Fund is scheduled for depletion in about 30 years unless “something” is done. That ”something” will have to be higher taxes or less benefits.
Our future tax structure is very uncertain because of our national crash course with debt. Pay your taxes today with a Roth instead of gambling your retirement on the uncertainty of future tax rates.
Tax rates aren’t the only reason to be checking out the Roth IRA. Check out this list of 10 Reasons To Own A Roth IRA. Among the reasons that you’ll find include the flexibility of being able to withdraw your contributions (but not earnings) at any time, being able to save for college or home costs in the account and being able to diversify your tax treatment on your retirement accounts if you continue to have a traditional IRA as well.
More Roth IRA Details
Want some more infomation on the Roth IRA, who is eligible, how much you can contribute and more? Check out these articles on 2013 Roth IRA rule changes, phaseout limits on the Roth, who is eligible for the Roth IRA and everything you need to know about the Roth Conversion Event.
Joe Plemon of Plemon Financial Coaching is the Money Columnist for The Southern Illinoisan.
This year, it happened — something many have been predicting for years: Taxes went up. And most likely, the hikes will just keep coming. There’s no other way to pay off the country’s debt and fund the ballooning entitlements due the baby boomers as they retire. The increases may not affect everyone, and those who earn more will pay more, but someone’s gotta pay.
One way to hedge against higher tax rates is to contribute to a Roth retirement account. Your contributions aren’t tax-deductible, but the withdrawals are tax-free once you turn 59 ½ and you’ve had a Roth account for at least five years. Who wouldn’t want tax-free money if tax rates are just going higher?
Well, as attractive as the Roth can be, it’s not always the best choice for everyone. You see, a contribution to a Roth means you are forgoing a contribution to a traditional retirement account, which might give you a tax-deduction today in exchange for paying taxes in retirement. So the choice is: Should you pay taxes today or in retirement?
Here’s the rule of thumb: If you’re in a higher tax bracket today than you will be in retirement, stick with the traditional account. However, if you expect to be paying a higher tax rate in your golden years, go with the Roth. The same math applies when considering a “conversion,” which is turning a traditional account into a Roth. The amount in the traditional IRA that comes from deductible contributions or investment growth is taxed as ordinary income in the year of the conversion, but then it grows tax-free.
That’s all handy-dandy, but there’s one problem: While it’s a safe bet taxes will go up, it’s difficult to predict what that will mean for any given individual. Still, here are some considerations:
For many reasons, such as a drop in income, most people pay fewer taxes in retirement than they did while they were working. Plus, it’s likely that senior citizens, as a group, will bear the smallest brunt of future tax hikes.
Make sure to factor in the difference in tax rates between the state where you currently live and the state to which you’ll retire, if you plan to move.
A traditional vs. Roth calculation assumes that any tax savings from contributing to the traditional account is invested and saved for retirement. If you’ll instead spend those tax savings, then the Roth looks much more attractive.
As an example, consider the situation of a Motley Fool reader, who posted his Roth conundrum on one of our discussion boards. He’s in the 33 percent federal tax bracket, and pays a 9 percent state income tax to boot. It’s possible he’ll move to Texas after he retires, which is among the seven states that don’t have an income tax. (The others include Florida and Nevada, also popular retirement destinations.) So if he were to contribute $10,000 to a Roth rather than a traditional account, he’d be giving up on a $4,200 tax deduction, factoring in both federal and state taxes. He’s better off sticking with the traditional account, especially factoring in the possible move to Texas.
Sneaking in through the backdoor
The fellow can contribute to a Roth 401(k) because his employer offers the option. Otherwise, he’d be out of luck since his income makes him ineligible for a Roth IRA. Once you earn a modified adjusted gross income (AGI) of $112,000 if you’re single or $178,000 if you’re married, your ability to contribute gradually phases out.
However, all is not lost for those who don’t have a Roth account at work, are ineligible for a Roth IRA, or have already maxed out their 401(k)s. It gets complicated, so stick with us.
First off, not all contributions to a traditional IRA are deductible. If you have a plan at work and are single with an AGI of $59,000 or are married and have an AGI of $95,000, your ability to deduct the contributions gets phased out. If you’re above those income limits, you can make a nondeductible contribution to a traditional IRA. As the name implies, you can’t deduct the contribution, but the investments still grow tax-deferred.
Now, here’s where the Roth comes in. If you don’t have any pretax money in traditional IRAs, including SEPs, SIMPLEs, and rollovers from prior employers’ plans, you can immediately convert that traditional IRA to Roth. (And by “you,” we mean that you can ignore what your spouse has.) Here’s the real bonus: Because you couldn’t deduct the contribution and because the account didn’t have an opportunity to grow, you won’t owe any taxes on the conversion. This little trick has become known as the “backdoor Roth.”
It gets complicated if you have pretax money in a traditional IRA, since the amount is prorated across all the accounts for tax purposes. For example, if you have $50,000 in pretax IRAs, and then you make a nondeductible contribution of $5,000 to a traditional IRA and immediately convert that account to a Roth, only 10 percent ($50,000 divided by $5,000) will be tax-free. However, there’s one possible way around this. You can transfer those pretax assets to your existing 401(k), if your employer allows it. The downside: 401(k)s have limited and often pricier investments, and most don’t allow individual stocks and bonds.
Finally, based solely on the math, younger people in the 15 percent or lower tax bracket who expect to build up a large portfolio over their careers should choose the Roth.
Other benefits of the Roth
That’s the math. But there are other perks to the Roth that might tip the scales in its favor if the math is fuzzy.
Contributions to a Roth IRA – not earnings – can be withdrawn tax- and penalty-free before age 59 1/2. This has its downsides, since it makes it more tempting to spend money that should be left for retirement. But there are some proponents of using the Roth IRA as a college savings account, and even an emergency fund.
Unlike the traditional IRA and 401(k), the Roth IRA does not have required minimum distributions (RMDs) at age 70 ½. The Roth 401(k) does, but you can transfer the money to a Roth IRA after you retire to get around RMDs.
Anyone who inherits a traditional IRA will have to pay ordinary income taxes on the distributions. However, the Roth account will still maintain its tax-free status. And nothing says “I love you” like giving someone tax-free retirement savings. (However, all retirement accounts are included in the calculation of whether estate taxes are due.)
The bottom line
We know the direction of tax rates (i.e., up), but we don’t know the magnitude and the targets. They’re decided by Congress, and who knows what those folks will do? Of course, they didn’t put themselves in office, which means the decision ultimately lies with the voters — and they can be even crazier. Some people argue that we can’t even assume that distributions from a Roth will remain tax-free. But just as diversification is important in your portfolio, tax diversification can also make sense. For many retiree wannabes, one way to hedge against future significant tax increases is to have at least some assets in a Roth account.
Taxes are unavoidable but that doesn’t mean you have to pay more than you owe. What happens to your tax liability with proper financial planning? The simple answer is that it can allow you to minimize what you owe while preserving more of your income to fund your financial goals. Talking to a financial advisor is a good first step in creating a strategy for effectively managing tax liability.
Understanding Tax Liability
Tax liability refers to the money that an individual, business or organization owes to a federal, state or local tax authority. A simpler way to think of your tax liability is the difference between your taxable income and the tax deductions you’re able to claim.
As a general rule of thumb, earning a higher income can result in a higher tax liability. The U.S. uses a graduated tax system, which means that income and tax rates move together. As income increases, so does your tax rate.
The amount you pay in taxes is determined by your income, but capital gains can also affect your tax liability. That’s important to know if you’re focused on investing and building wealth, as higher net-worth individuals may face a steeper tax liability if they’re reaping capital gains from investments.
What Happens to Your Tax Liability With Proper Financial Planning?
Managing your tax liability is important as it can directly influence how much of your income or investment earnings you get to keep. The more income and assets you have to work with, the easier it becomes to build wealth.
Proper financial planning can help you implement strategies that are designed to minimize taxes while maximizing income and assets. Having a solid financial plan in place can generate significant tax savings year by year. You can then use those savings to generate additional income through investments, grow your retirement accounts and increase your net worth.
Does financial planning require you to work with a financial advisor? Not necessarily. You could always go it alone. But there are some distinct advantages to having a financial advisor help you formulate a plan for managing tax liability.
Financial advisors have extensive knowledge about how tax planning can affect your financial plan. A good advisor is also familiar with the tax code and the latest tax rules. Even if you think you have a relatively straightforward tax situation, a financial advisor may be able to pinpoint areas where you can improve tax efficiency that you might have missed.
Financial Planning Strategies for Minimizing Tax Liability
There are different ways to approach tax planning in order to reduce your tax bill, depending on the specifics of your situation. If you’re working with a financial advisor to create a tax plan, then it may include any or all of the following.
Retirement Planning
Retirement planning is a focal point of a solid financial plan, particularly with regard to taxes. Aside from ensuring that you have enough money to retire, it’s also important to consider how much of your savings you’ll be able to keep once you start making withdrawals.
In terms of how you plan for retirement, your financial advisor may suggest any of the following:
Maxing out annual contributions to a traditional 401(k) or to a Roth 401(k) if you have that option.
Contributing money to a traditional or Roth IRA each year.
Funding a Health Savings Account (HSA) if you have that option with a high deductible health plan.
If you’re self-employed or own a business, you might open a solo 401(k), SEP IRA or SIMPLE IRA to save for retirement instead. It’s important to understand the tax treatment of different retirement savings options.
For example, traditional 401(k) plans and traditional IRAs allow for tax-deductible contributions. Qualified distributions are taxed as ordinary income in retirement. Roth accounts don’t offer a tax deduction, but you can make withdrawals tax-free when you retire.
A Health Savings Account is not a retirement account, per se. It’s meant to be used to save money for medical expenses, but it can double as a source of retirement income since you can withdraw funds for any purpose after age 65 without a tax penalty. You’ll just owe regular income tax on withdrawals.
Investment Planning
Investment planning is related to retirement planning, but it can include different aspects of managing tax liability. For instance, say that you’re investing through a taxable brokerage account, which is subject to capital gains tax. Your financial advisor can offer different strategies for managing tax liability, which may include:
Holding investments longer than one year to take advantage of the more favorable long-term capital gains tax rate.
Choosing tax-efficient investments, such as exchange-traded funds (ETFs), which can trigger fewer turnover events than traditional mutual funds.
Harvesting tax losses to offset some or all of your capital gains for the year.
Your advisor may also be able to guide you on how to deduct expenses related to investment properties if you own one or more rental homes. They could also help with executing a 1031 exchange if you’re interested in swapping out one property for another to minimize capital gains tax.
Tax Deductions and Credits
Tax deductions reduce your taxable income, which can help to push you into a lower tax bracket for the year. There are numerous expenses you might be able to deduct, including:
Mortgage interest
State and local taxes
Charitable donations
Business expenses
Self-employment expenses
Medical expenses
Student loan interest
Tax credits, meanwhile, reduce what you owe in taxes on a dollar-for-dollar basis. For instance, if you owe $1,000 in taxes and qualify for a $1,000 tax credit, the credit can wipe out what you owe. Some credits are refundable which can increase the size of your tax refund for the year. A financial advisor can walk you through the various deductions and credits you might be eligible to take in order to reduce your tax liability.
Withdrawal Planning
As you approach retirement, it’s important to consider how you’ll withdraw the money that you’ve saved. Your advisor can discuss different strategies for withdrawing money from a 401(k), IRA or taxable brokerage account so that you’re not overpaying taxes or draining your retirement reserves too quickly.
Your advisor may also discuss ways to tax-friendly ways to create supplemental income in retirement, such as purchasing an annuity or taking out a reverse mortgage. An advisor can also help you figure out when to take Social Security benefits to maximize your payment amount and how to coordinate those benefits with other sources of income in retirement.
The Bottom Line
Knowing what happens to your tax liability with proper financial planning is important for creating a long-term strategy for growing wealth. Handing over more money than you need to in taxes doesn’t offer any tangible benefit and it can be problematic if it leaves you with less money to save and invest. Having a trusted financial advisor to work with can ensure that you’re meeting your tax obligations without shortchanging your goals.
Financial Planning Tips
Tax planning can seem complicated if you’re not well-versed in the Internal Revenue Code. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Robo advisors can offer a more affordable way to manage financial planning, as the fees may be lower than what traditional advisors charge. However, it’s important to know what you’re getting for the money. For example, some robo-advisors offer tax loss harvesting but not all of them do. Additionally, robo-advisors aren’t really equipped to offer one on one advice about tax planning or investing. Those are good reasons to consider working with a human advisor instead, even if it means paying a slightly higher fee.
Rebecca Lake, CEPF®
Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
By Jason Topp24 Comments – The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited May 14, 2012.
Oh what a great year for debate on Roth IRA’s and Roth IRA Conversions! Roth IRAs are a great tool for building up retirement savings, but some things have changed for conversions.
2010 has ushered in some new Roth IRA rules -here’s what you need to know about the 2010 Roth conversions.
I recently received a comment from a reader that I thought garnered a little more attention. Here’s what the reader asked:
My wife and I had traditional non-deductible IRAs and converted at the beginning of this year. We assume that the Roth conversions wouldn’t cause us any tax liability since our contributions to the traditional IRAs exceeded their values at the time of the conversion. Have you heard anything about the tax implications of Roth conversions from traditional non-deductible IRAs?
So what we know from the statement above is that they converted to Roth IRAs from Traditional, non-deductible IRAs. We also know that there were no gains in the account, meaning it was strictly contributions – and they’re wondering what their tax implications will be on this move.
This is a GREAT question!
What is a Traditional Non-Deductible IRA
Let’s define what a traditional, non-deductible IRA is so that we are all on the same page.
Generally speaking a traditional IRA allows money to be contributed pre-tax, which means that you get to take a deduction for it. It’s deductible off of your gross income. This also means that when you withdraw from your IRAs this money becomes taxable at that time!
So, for example, you put in $5,000 to a traditional IRA, you are allowed to subtract $5,000 from your income, which in turn gives you less reportable income to pay taxes on.
Of course the IRS has some funky little rules to spoil how much you can stash into traditional IRAs.
Basically, if you already participate in an employer-sponsored retirement plan – meaning you have a 401k, 403b or SEP IRA etc. – AND you make too much money then you get phased out of your “deductibility” of the IRA and the contributions then turn into non-deductible IRA contributions!
It’s as if you put after-tax money into the IRA.
What are the Income Limitations for Deductible IRAs
Let’s take a look at the rules for tax year 2009:
If you are a single filer and are covered by an employer-sponsored retirement plan you begin getting phased out of your deductible IRA contributions if you have an adjusted gross income (AGI) between $55,000 and $65,000.
If you’re married filing jointly, covered under an employer-sponsored retirement plan then you begin getting phased out between $89,000 and $109,000 AGI.
If you’re making more than this then your entire contribution to the Traditional IRA is non-deductible!
What are the Tax Implications of a Non-Deductible IRA to Roth IRA Conversion
Back to the question at hand – how will this affect me on my taxes?
So here’s a couple things to consider:
What is your basis (contributions to the IRA) and what is the earnings amount? In the reader’s case they didn’t have any gains to worry about. But if they did, they’d have to pay tax on the earnings portion.
If you had no other IRAs in place (including SEP, SIMPLE and Traditional) then you’re good to go – no taxes due!
If you did have other IRAs in place, then you may not be in as great a shape as you thought – you may owe Uncle Sam!
Here’s what I mean on the last two:
The rule with a Non-deductible IRA is that you MUST aggregate all your non-Roth IRAs together as one big account when doing a Roth conversion in order to determine the tax liability.
Here’s an example:
Let’s say you have two IRAs with a total value of $30,000. One is a traditional IRA that has a $15,000 balance and all of that is pre-tax.
The other is a non-deductible IRA that includes $15,000 of nondeductible, or after-tax, contributions and no earnings as in the reader’s case.
If you decide to convert all $30,000 of your IRA money, then $15,000 (the amount you contributed to the non-deductible IRA on an after-tax basis) would not be taxable since you’ve already paid the tax on that money.
But the remaining $15,000 would be taxable because Uncle Sam hasn’t got his piece of that pie yet (it’s pre-tax contributions plus earnings that have not been taxed yet)
Let’s say you only want to convert your non-deductible IRA funds since there are no gains and you’ve already paid tax on the contributions – what happens?
In theory, this is a great strategy, but as mentioned, you have to consider all non-Roth IRAs as one big pie.
The Uh-Oh
In the example above, your already-taxed nondeductible contributions of $15,000 account for 50% of your total, while the $15,000 of pre-tax deductible contributions and investment earnings represent the other 50% of your $30,000 IRA pie.
Whether you convert the entire $30,000 or just a slice of it, 50% is considered taxable income.
It doesn’t matter where you take that slice from (non-deductible or pre-tax) – each has the same ingredients of taxable and nontaxable money as the whole!
What You Need to Do
If you find yourself in this situation, you’ll need to fill out IRS form 8606 and wade through the instructions and the mire!
Getting divorced can cause both emotional and financial upheaval for everyone involved. One of the most important questions you and your soon-to-be former spouse may have to decide centers on how to divide retirement assets.
Understanding the key issues around divorce and retirement can make it easier to untangle them as you bring your marriage to a close.
Taking Note of Your Retirement Accounts
The average cost of divorce can range from several hundred to several thousand dollars, so it’s important to know what’s at stake financially. Managing retirement accounts in divorce starts with understanding what assets you have.
There are several possibilities for saving money toward retirement, and different rules apply when dividing each. Here’s a look at what types of retirement accounts you may hold and thus will need to consider in your divorce.
401(k)
A 401(k) plan is a defined contribution plan that allows you to save money for retirement on a tax-advantaged basis. Your employer may also make matching contributions to the plan on your behalf. According to the Census Bureau, 34.6% of Americans have a 401(k) or a similar workplace plan, such as a 403(b) or Thrift Savings Plan.
IRA
Individual retirement accounts, or IRAs, also allow you to set aside money for retirement while enjoying some tax benefits. The difference is that these accounts are not offered by employers. There are several IRA options, including:
• Traditional IRAs, which allow for tax-deductible contributions.
• Roth IRAs, which allow for tax-free withdrawals in retirement.
• SEP IRAs, which follow traditional IRA tax rules and are designed for self-employed individuals.
• SIMPLE IRAs, which also follow traditional IRA tax rules and are designed for small business owners.
Each type of IRA has different rules regarding who can contribute, how much you can contribute annually, and the tax treatment of contributions and withdrawals.
💡 For more info, check out our guide on individual retirement accounts (IRAs).
Pension Plan
A pension plan is a type of defined benefit plan. The amount you can withdraw in retirement is determined largely by the number of years you worked for your employer and your highest earnings. That’s different from a 401(k), since the amount you can withdraw depends on how much you (and your employer) contribute during your working years.
How Are Retirement Accounts Split in a Divorce?
How retirement accounts are split in divorce can depend on several factors, including what type of accounts are up for division, how those assets are classified, and divorce laws regarding property division in your state. There are two key issues that must be determined first:
• Whether the retirement accounts are marital property or separate property
• Whether community property or equitable distribution rules apply
Legal Requirements for Dividing Assets
Marital property is property that’s owned by both spouses. An example of a tangible marital property asset is a home the two of you lived in together. Separate property is property that belongs to just one spouse.
In community property states, spouses have an equal share in assets accrued during the marriage. Equitable distribution states allow for an equitable — though not necessarily equal — split of assets in divorce.
You don’t have to follow state guidelines if you and your spouse can come to an agreement yourselves about how divorce assets should be divided. However, if you can’t agree, then you’ll be subject to the property division laws for your state.
If retirement assets are to be divided in divorce, there are certain steps that have to be taken to ensure the division is legal. With a workplace plan, you’ll need to obtain a Qualified Domestic Relations Order (QDRO). This is a court order that specifies how much each spouse should receive when dividing a 401(k) or similar workplace plan in divorce.
IRAs do not require a QDRO. You would, however, still need to put in writing who gets what when dividing IRAs in divorce. That information is typically included in the final divorce settlement agreement, which a judge must sign off on.
Protecting Your 401(k) in a Divorce
The simplest option for how to protect your 401(k) in a divorce may be to offer your spouse assets of equivalent value. For example, if you’ve saved $500,000 in your 401(k) and you jointly own a home that’s worth $250,000, you might agree to let them keep the home as part of the divorce settlement.
If they’re not open to the idea of a trade-off, you may have to split the assets through a QDRO. That could make a temporary dent in your savings, but you might be able to make it up over time if you continue to make new contributions.
You could skip the QDRO and withdraw money from your 401(k) to fulfill your obligations to your spouse under the terms of the divorce settlement. However, doing so could trigger a 10% early withdrawal penalty if you’re under age 59 ½, along with ordinary income tax on the distribution.
Protecting Your IRA in a Divorce
Traditional and Roth IRAs are subject to property division rules like other retirement accounts in divorce. Depending on where you live and what laws apply, you might have to split your IRA 50/50 with your spouse.
Again, you might be able to protect your IRA by asking them to accept other assets instead. Whether they’re willing to agree to that might depend on the nature of those assets, their value, and their own retirement savings.
If you’re splitting an IRA with a spouse, the good news is that you can avoid tax consequences if the transaction is processed as a transfer incident to divorce. Essentially, that would allow you to transfer money out of the IRA to your spouse, who would then be able to deposit it into their own IRA.
Divorce and Pensions
Pension plans are less common than 401(k) plans, but there are employers that continue to offer them. Generally, pension plan assets are treated as marital property for divorce purposes. That means your spouse would likely be entitled to receive some of your benefits even though the marriage has ended. State laws will determine how much your spouse is eligible to collect from your pension plan.
Protecting Your Pension in a Divorce
The best method for protecting a pension in divorce may be understanding how your pension works. The type of payout option you elect, for instance, can determine what benefits your spouse is eligible to receive from the plan. It’s also important to consider whether it makes sense to choose a lump-sum or annuity payment when withdrawing those assets.
If your spouse is receptive, you might suggest a swap of other assets for your pension benefits. When in doubt about how your pension works or how to protect pensions in a divorce, it may be best to talk to a divorce attorney or financial advisor.
Opening a New Retirement Account
Splitting retirement accounts in a divorce can be stressful. It’s important to know what your rights and obligations are going into the process. If you’re leaving a marriage with less money in retirement, it’s a good idea to know what options you have for getting back on track. That can include opening a new retirement account.
SoFi offers individual retirement accounts for people who want to invest with minimal hassle. You can open a traditional or Roth IRA online and choose between active or automated investing to fit your needs and goals.
Easily manage your retirement savings with a SoFi IRA.
FAQ
How long do you have to be married to get part of your spouse’s retirement?
If you’re interested in getting spousal retirement benefits from Social Security, you have to be married for at least one continuous year prior to applying. The one-year rule does not apply if you are the parent of your spouse’s child. Divorced spouses must have been married at least 10 years to claim spousal benefits.
Is it better to divorce before or after retirement?
Neither situation is ideal, but divorcing before retirement may be easier if there are fewer assets to divide. Getting a divorce after retirement can raise questions over how to divide retirement and non-retirement assets. It may also lead to financial insecurity on the part of one or both spouses if the distribution of assets is unequal.
Who pays taxes on a 401(k) in a divorce?
If you’re dividing up your 401(k) prior to divorcing then you would be responsible for paying any taxes or penalties owed. Waiting until after the divorce is finalized to split your 401(k) with your former spouse could reduce the amount of taxes and penalties you owe.
Photo credit: iStock/FG Trade Latin
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Long, long ago, in a mystical forest with good Wi-Fi, Goldilocks opened an investing account with $3,000 to invest.
At first, she considered pouring more money into her retirement accounts (which only holds mutual fund investments). But her Roth IRA was already maxed out for the year. Moreover, she knew that she would need this money sooner than age 65.
“Too cold!” she said.
Next, she considered investing in individual stocks. But even though she’d done her due diligence, she knew that investing in individual securities can be very risky. She didn’t need to become a millionaire overnight – she just wanted to make enough money to buy a cottage in a few years.
“Too hot!” she said.
Finally, she began browsing ETFs. ETFs are generally more stable, diverse, and safe investments than individual stocks, but they’re also more accessible than your retirement account.
“Juuuuust right!” she said aloud.
10 years later, Goldilocks’ investment had paid off – thanks to a steady 10% APY, her $3,000 investment had become nearly $8,000, so she was finally able to pay restitution and legal fees to the family of bears down the way.
Thanks to inherent diversity and steady returns, ETFs are a great place to stash a few grand to help you save for a big expense years or decades down the line.
What’s Ahead:
Large-cap stock ETFs
Large-cap ETFs typically bundle together blue-chip stocks or even an entire index, providing steady, sizeable returns. Warren Buffet once famously said:
“I just think that the best thing to do is buy 90% in S&P 500 index fund.”
So I’ve included two such options on the list.
You’ll also see a lot of Vanguard funds on this list because, well, they’re just awesome all the way around. Vanguard funds are extremely popular among investors because they combine industry-leading returns with incredibly low expense ratios.
ETF
Symbol
Fund info
Expense ratio
Schwab US Large-Cap Growth ETF™
SCHG
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index.
0.04%
SPDR S&P 500 ETF
SPY
The SPDR® S&P 500® ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index (the “Index”).
0.0945%
Vanguard S&P 500 ETF
VOO
The Vanguard S&P 500 ETF invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies.
0.03%
Vanguard Russell 1000 Growth ETF
VONG
The investment seeks to track the performance of the Russell 1000® Growth Index. The index is designed to measure the performance of large-capitalization growth stocks in the United States.
0.08%
Mid-cap stock ETFs
Goldilocks’ choice – mid-cap ETFs – bundle together companies that have an exciting growth curve before them, but are established enough not to fold overnight.
If you can tolerate a little more risk in exchange for higher potential returns than an index fund, consider these top picks:
ETF
Symbol
Fund info
Expense ratio
Vanguard Mid-Cap Growth ETF
VOT
VOT seeks to track the performance of the CRSP US Mid Cap Growth Index, which measures the investment return of mid-capitalization growth stocks.
0.07%
iShares Core S&P Mid-Cap ETF
IJF
IJF seeks to track the investment results of an index composed of mid-capitalization U.S. equities.
0.05%
Vanguard Mid-Cap ETF
VO
VO seeks to track the performance of the CRSP US Mid Cap Index, which measures the investment return of mid-capitalization stocks.
0.04%
Schwab U.S. Mid-Cap ETF
SCHM
SCHM’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Mid-Cap Total Stock Market Index.
0.04%
Small-cap stock ETFs
If you’ve looked at your asset portfolio recently and thought “hmm… needs a little more spice,” then a small-cap ETF might add just the right amount of kick.
These ETFs track small companies with big potential, so they present higher risk but higher potential reward than large- or mid-cap ETFs.
ETF
Symbol
Fund info
Expense ratio
Vanguard S&P Small-Cap 600 Growth ETF
VIOG
VIOG employs an indexing investment approach designed to track the performance of the S&P SmallCap 600® Growth Index, which represents the growth companies, as determined by the index sponsor, of the S&P SmallCap 600 Index.
0.15%
Vanguard Small-Cap ETF
VB
VB seeks to track the performance of the CRSP US Small Cap Index, which measures the investment return of small-capitalization stocks.
0.05%
iShares Core S&P Small-Cap ETF
IJR
IJR seeks to track the investment results of an index composed of small-capitalization U.S. equities.
0.06%
Schwab U.S. Small-Cap ETF
SCHA
SCHA’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Small-Cap Total Stock Market Index.
0.04%
International stock ETFs
ETF
Symbol
Fund info
Expense ratio
Vanguard Emerging Markets ETF
VWO
VWO invests in stocks of companies located in emerging markets around the world, such as China, Brazil, Taiwan, and South Africa.
0.10%
Vanguard Total International Stock ETF
VXUS
VXUS seeks to track the performance of the FTSE Global All Cap ex US Index, which measures the investment return of stocks issued by companies located outside the United States.
0.08%
SPDR® MSCI EAFE Fossil Fuel Free ETF
EFAX
EFAX seeks to offer climate-conscious investors exposure to international equities while limiting exposure to companies owning fossil fuel reserves.
0.20%
Vanguard FTSE Developed Markets ETF
VEA
VEA provides a convenient way to match the performance of a diversified group of stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region.
0.05%
Fixed income ETFs
ETF
Symbol
Fund info
Expense ratio
iShares Core U.S. Aggregate Bond ETF
AGG
AGG seeks to track the investment results of an index composed of the total U.S. investment-grade bond market.
0.05%
Vanguard Total Bond Market ETF
BND
BND’s investment objective is to seek to track the performance of a broad, market-weighted bond index.
0.035%
Vanguard Intermediate-Term Corporate Bond ETF
VCIT
VCIT seeks to provide a moderate and sustainable level of current income by investing primarily in high-quality (investment-grade) corporate bonds.
0.05%
Schwab 1-5 Year Corporate Bond ETF
SCHJ
SCHJ’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the short-term U.S. corporate bond market.
0.05%
What does large-cap, mid-cap, etc. mean?
To start, “cap” refers to market capitalization, or the total value of a company’s shares on the market. For example, if a company has 1 million shares on the market valued at $10 a pop, their market cap would be $10 million.
Large-cap ETFs are comprised of companies each with a market cap of $10 billion or higher. The Vanguard Mega Cap ETF (MGC), for example, contains around 250 of the biggest companies in the USA, from Amazon to Apple. Since they’re often full of blue-chip stocks that provide slow-but-steady returns, large-cap ETFs are considered a safe, long-term investment.
Mid-cap ETFsare comprised of companies each with a market cap in the $2 to $10 billion range. All ETFs are designed to succeed and make money, so mid-cap ETFs are filled with midsized companies that are in the middle of their “growth curve,” so to speak – they’re high-performing, high-potential companies that may become the next blue-chip, so mid-cap ETFs balance risk and reward.
Small-cap ETFsare comprised of companies each with a market cap of “just” $300 million to $2 billion. Fund managers who design small-cap ETFs cast a wide net, aiming to scoop up “the next big thing.” As a result, these ETFs have higher growth potential than most ETFs, but also steeper downside if the smaller companies within end up folding.
International ETFsare, as the name so subtly hints, full of non-U.S. stocks and securities. There are country-specific ETFs, foreign industry ETFs (think non-U.S. automotive stocks), and even ETFs representing emerging markets like sub-Saharan Africa and Brazil.
Fixed income ETFs, aka bond ETFs, give you access to diverse bond investments. For the uninitiated, bonds are like loans you make to companies or governments that they pay back with interest. You can read more about bonds here, but the bottom line is this: fixed-income ETFs provide steady income in the form of dividends, so they’re a good choice if you want a safe investment that gives you a paycheck!
Read more:How To Invest In ETFs
Which type of ETF is right for you?
Well, it depends on both your goals and your risk tolerance.
If you can tolerate some risk in your portfolio, and want your ETF investment to pay off sooner than later (within five years), you may want to consider small-cap and mid-cap ETFs. They’re riskier, but have higher upside potential.
If you’re looking for a safer investment that will multiply your money over a longer horizon (5+ years), a large-cap ETF is probably a fit.
If you’d like your ETF investment to provide a trickle of cashback each month, fixed income ETFs are probably your best bet.
And finally, if you don’t mind doing a little research or believe strongly in the economic performance of a foreign market, you’ll be a fan of international ETFs.
Read more: How To Determine Your Investing Risk Tolerance
About our criteria
With hundreds of commission-free ETFs available, how did these become the winners?
To make this list, ETFs had to impress in all of the following categories:
Earnings potential.Naturally, the first thing looked at was the ETF’s performance over the past five years. A good sign of a healthy ETF is how quickly it bounced back in Q3 2020 after the market panic surrounding the COVID-19 pandemic. Springboarding back and surpassing Q1 levels are a sign of investor confidence, and helped solidify the ETF’s place on this list.
Expense ratio.Next, I looked at the ETF’s expense ratio. Your expense ratio is the percentage of your investment you pay to the fund manager for having shares of the ETF. Although measured in fractions of a percent, expense ratios make a difference – 0.80% of $10,000 is $80 and 0.04% is just $4, so ETFs with an expense ratio below 0.20% were favored.
Fund reputation. You’ll see a lot of repeated names on this list because funds like Schwab, BlackRock (iShares), and especially Vanguard have a proven track record of building well-crafted, reliable ETFs with low expense ratios. Fund reputation matters in the long run because big funds attract big money, which helps to generate higher returns for you!
Solid fundamentals.ETFs aren’t just random grab bags of stock and securities – each one is a carefully curated list, with selection criteria driven by both AI and human logic. There are some wacky and unique ETFs out there – such as Millennial ETFs and Space ETFs – and I’ll cover more of them in an upcoming piece. But this list isn’t for the experimental, exciting stuff – it’s for safe, dare I say boring, places to stash and multiply your savings.
Conscious investing.Finally, this was more of a small thing in the back of my mind, but I wanted each ETF on this list to score average or above average for “conscious capitalism.” No fossil fuels, no sin stocks (learn more about sin stocks here) – and not just because it’s not the way of the future, but because investments in conscious capitalism generally outperform “sinful” investments in the long term.
Commission-free ETFs solve a big problem for young investors
Commission-free ETFs aren’t just great because they’re cheap – they actually solve a pretty serious problem plaguing young ETF investors.
You see, ETFs have heftier commissions and trade fees than stocks because ETFs can be resource-intensive to create. Let’s say you’re a fund manager and you have an idea for an ETF. The process to get your ETF approved by the SEC isn’t unlike getting your new drug approved by the FDA; you have to research a ton, understand the risks, and propose your ETF to the government.
Once your ETF is approved and available, you probably want some additional compensation for your work beyond just capital gains from your ETF.
You don’t want to charge a high percentage trade fee, because big-ticket investors will be turned off. So, instead, you charge a $10 to $20 fee per trade of your ETF.
Big-ticket investors who drop $50,000 on a trade couldn’t care less about a $20 fee, since that represents just 0.04% of their investment. But if you’re a young investor, investing maybe $50 to $100 out of each monthly paycheck, a $20 per-trade fee is way too high – basically pricing us out of ETF investing. 🙁
Thankfully, many brokerages have realized that their per-trade fees are too high for young investors and have eliminated commissions on trades of certain ETFs. At first, funds like Vanguard and Fidelity only let you trade commission-free on their own platforms, but now, they’ve expanded their commission-free goodness to wide platforms like J. P. Morgan Self-Directed Investing.
And it’s not just the junk ETFs that get traded commission-free – in fact, it’s often quite the opposite. Firms like Vanguard and Fidelity will let you trade their most successful ETFs for free – presumably because they don’t really need the commission.
Disclosure – INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
Summary
If you’re looking for an investment vehicle falling somewhere between your boring retirement account and your exciting individual stock purchases, ETFs are an excellent choice. And now that the big funds are waiving commissions on their top-performing ETFs, there’s never been a better time to dive into the world of ETFs and inject some low- to mid-risk into your portfolio.
ETFs are also an excellent investment if you’re looking to multiply your money and cash out within 2 to 10 years. You can even leave your ETF investment until retirement, if you want, so it has plenty of time to multiply under compound interest.
Not all ETFs are made the same, however – and the SEC has approved some stinkers over the years, for sure. These ETFs, on the other hand, are universally considered top-ranked and well-supported within the investor community – and are a superb place to start.