After I wrote a simple primer on Roth conversions a couple weeks ago, several readers reached out asking for more details. A few specific snippets of those questions include:
I see many articles like this about lowering your tax bracket when doing Roth conversions. But, what about the amount of money that can be made by not doing Roth conversions and letting the taxable [sic: qualified, or not taxable] money grow in an account like an IRA or 401K? Is that math too hard to explain?
Sure your RMDs will be higher and you will be taxed more, but how much more money will you make by letting that tax deferred money grow? You could assume a rate of return at 6% for the illustration.
Kelly M., Question 1
A wise man once said “never pay a tax before you have to.” Back around 2015 I had the owner of an income tax service try to convince me to convert all my traditional IRA money to Roth. He said tax rates were going to go up and he was converting all of his own personal traditional IRAs. Fast forward to 2017 and Congress actually ended up lowering tax rates. I wonder what he thought about his conversions after that.
Anonymous, Question 2
Even with my spouse still working, I don’t think we’ll hit the IRMAA limits while I do Roth conversions before I take Medicare. But, could Roth conversions now help me avoid the IRMAA thresholds when I’m taking RMDs in the future? Or, is it worth doing Roth conversions to avoid the IRMAA thresholds? I’d be interested in an article like that.
Anonymous, Question 3
To summarize those three questions:
Does the math of Roth conversions really work?
But since we don’t know future tax rates, how can we confidently convert assets today?
What about IRMAA (the income-related monthly adjustment amount), which is an additional Medicare surcharge on high-earners?
Let’s address these questions one at a time.
Does the Math of Roth Conversions Really Work?
Roth conversions involve many moving pieces, as you’ll see in this simple Roth conversion spreadsheet.
Reminder: you can make a copy of the spreadsheet via File >> Make a Copy
There are terrific financial planning software packages that take care of this math. I wanted to present 95% of the good stuff in a free format that you all can look at. Hence, Google Sheets.
Nuanced Tax Interactions
Especially important is the interaction between normal income (via Traditional account withdrawals), capital gains, and Social Security. These taxes interplay in nuanced ways. A simple example:
Let’s say a Single retiree’s annual income is:
$5000 in interest income
$5000 in long-term capital gains
$30,000 in Social Security benefits.
If you plug that into a 1040 tax return, you’ll find that:
None of that Social Security income is taxable.
All of the interest and capital gains are enveloped by the Standard deduction
Resulting in zero taxable income and a $0.00 Federal tax bill.
But if we copied Scenario A and added in $30,000 in Traditional IRA distributions, what happens? I think we all expect that the $30,000 distribution itself must have a taxable component, but you might not know that:
The IRA distribution affects Social Security taxability. Now, $22,350 of the Social Security income becomes taxable. That’s right. Simply by distributing IRA assets, you’ve now increased how much Social Security you pay taxes on.
The Standard deduction still helps, but there’s now a remainder of $48,500 in Federal taxable income.
Resulting in a $5584 Federal tax bill.
It’s not the end of the world. Taxes happen. They pay for our public shared interests.
But part of tax planning is understanding ahead of time what your future tax bills will look like. It’s important to understand how taxes interact. And this is just a simple example!
Measuring Roth Conversion Benefits
Going back to this spreadsheet, you’ll three tabs full of retirement withdrawal math. The Assumptions tab contains important information on our hypothetical retiree’s starting point (e.g. $2.9M in investable assets), their annual spending ($100K), their future assumed growth (5% per year, after adjusting for inflation), and other important numbers.
Note – this math takes place in “the convenient world” where inflation is removed from the math.
Then three tabs are presented with different Roth conversion scenarios, described below:
“Baseline Calculations“
This tab shows a retiree not focused on any conversions
They want to leave to their children both Roth assets (if possible) and taxable assets (on a stepped-up cost basis).
Therefore, they attempt to fund as much of their retirement using Traditional assets as possible
“No Trad Withdrawals”
This tab shows a “worst case” scenario, to help bookend the analysis. This retiree is not pulling any funds from their Traditional accounts (unless necessary). Thus, we’d expect them to have large RMDs and large RMD-related tax bills.
“Reasonable Conversions”
This tab shows a “reasonable” Roth conversion timeline, electing to convert $1.7 million throughout their retirement, while funding their lifestyle using a mix of Traditional, Roth, and taxable assets along the way.
By no means is this “optimized.” But it’s reasonable, and better than the first two scenarios, as we’ll see below.
Pros, Cons, and Results
The three scenarios end up similar in multiple ways.
Our retiree never has an issue funding their annual lifestyle. This is of utmost importance.
Our retiree reaches age 90 (“death”) with roughly $5M in each scenario.
But there are important differences (as we’d suspect).
The Baseline scenario ends with $5.00M. Of that, 27% is Traditional, 35% is Roth, and 34% is Taxable. They’ve paid an effective Federal tax rate of 20.7% throughout retirement.
The No Traditional Withdrawal scenario ends with $5.20M. Of that, 63% is Tradtional, 0% is Roth, 37% is Taxable. They’ve paid an effective Federal tax rate of 18.8% throughout retirement.
The Reasonable Conversions scenario ends with $5.17M. 18% is Traditional, 68% is Roth, and 14% is Taxable. They’ve paid an effective Federal tax rate of 13.9% throughout retirement.
The Same, But Different
These three scenarios share many similarities. All three result in successful retirements. But there are important differences.
Our Roth converter paid far fewer taxes and, ultimately, left a majority of their tax dollars to their heirs via Roth vehicles, and thus tax-free.
The No Trad Withdrawal retiree paid 28% effective tax rates in their final years (only going further up in the future) and left 63% of their assets in Traditional accounts with a large asterisk on them.***
***TAXES DUE IN THE FUTURE*** …unless you’re leaving the Traditional IRA assets to, for example, a non-profit charity. But if you’re leaving the Traditional IRA to your kids, they’ll owe taxes when they withdraw the funds.
Long story short: Roth conversions work to your benefit when executed intelligently.
Should You Worry About Leaving Behind Traditional Assets?!
I don’t want to freak you out. Your heirs will appreciate you leaving behind a 401(k) or Traditional IRA for them.
But it’s worth understanding that they’ll owe taxes on that money (usually). Let’s dive into an example with simple math: a $1 million Traditional IRA left to one person (e.g. your child).
That person will most likely set up an Inherited Traditional IRAand (via new-ish rules in the SECURE Act) will have to empty that account by the end of the 10th year after your death. The withdrawals can be raised and lowered during those 10 years. Much like with Roth conversions, it makes sense to take larger withdrawals during otherwise low-income years and vice versa.
But if the beneficiary is in the middle of their career, a series of 10 equal withdrawals makes sense. Some rough math suggests ~$135,000 per year is a reasonable withdrawal amount (based on account growth over the 10 years).
That withdrawal is taxed as income for the beneficiary. If they’re already earning $100,000 per year of normal income, then taxes will consume ~$41,000 of their annual $135,000 withdrawal. State taxes might take another bite.
Again – I don’t want anyone to cry over the prospect of inheriting $94,000 annually for 10 years. Where can I sign up?! But it’s also worth understanding that 30% of this inheritance is going to Federal taxes.
“Never Pay a Tax Before You Have To”
What about Question #2 from the beginning of the article? A reader wrote in and suggested one should “never pay a tax before you have to.”
While pithy, it’s false.
If you can reasonably front-load low tax rates to prevent later high tax rates, the math supports you. What we’ve covered so far today is clear evidence of that.
Now, in the reader’s defense: I’d rather delay taxes if thedollar amounts are exactly the same. That’s one argument behind the tax-loss harvesting craze: I’d rather pay $100 in taxes in the future than $100 in taxes today.
But Roth conversions work differently. Done well, Roth conversions allow you to pay a 22% tax on $50,000 today to prevent a 37% tax on $100,000 in the future. It’s apples-and-oranges compared to the tax-loss example.
And perhaps the bigger lesson: there are few universal rules in personal finance. The pithy rule that works in one scenario (“never pay a tax before you have to”) might fail miserably in another scenario. Let the math guide you.
What About IRMAA?
Irma used to only be a name you’d give to the great-grandmother character in your 11th-grade B-minus fiction story.
No longer! Today, IRMAA has been given new life (which, I bet, was covered by Medicare!)
IRMAA (Income-Related Monthly Adjustment Amount) is a Medicare premium surcharge imposed on higher-income beneficiaries in addition to their standard Medicare Part B and Part D premiums. The amount of IRMAA is determined based on an individual’s modified adjusted gross income (MAGI) and can result in higher healthcare costs for those with higher incomes.
In plain English: high-earners pay more for Medicare.
Question #3 today asked if Roth conversions can be used to avoid IRMAA premiums. The answer is: yes.
But first, how painful are these IRMAA surcharges in the first place?!
Important note: you’ll see below that the 2023 IRMAA brackets are based on 2021 modified adjusted gross income (MAGI). That same 2-year delay holds for future years. Your 2024 Roth conversions (or lack thereof) will be important in determining IRMAA in 2026
If a married couple’s MAGI in 2021 was $225,000, they’d end up paying $231 per month (or, more accurately, $462 per month for the couple) as opposed to $330 for the couple if they earned less than $194,000. That’s a difference of $132 per month or $1584 for the year.
I’m of two minds here. Because:
Yes, I believe in frugality. A penny saved is a penny earned. Why pay $1584 extra if you don’t have to?
But if you’re earning $200,000in retirement, do you also need to stress over a $1500 annual line item?
Personally, I’ll be stoked if my retirement MAGI is $200,000. It’ll be a sign that my financial life turned out unbelievably well. I won’t mind the IRMAA.
The people most likely to suffer IRMAA are also best positioned to deal with it.
Will IRMAA Get You?
The 2-year delay in IRMAA math means you might get IRMAA’d early on in retirement.
Imagine retiring at the end of 2023. The peak of your career! You and your spouse earned a combined $300,000 and now you’re settling down to mind your knitting. Like all U.S. citizens, you sign up for Medicare just before you turn 65.
Come 2025, Uncle Sam and Aunt IRMAA are going to look back at your 2023 income and surcharge you.
But the good news, most likely, is that your 2024 income is quite low in comparison and IRMAA will drop off in 2026.
Can Roth Conversions Help?
Remember: RMDs are forced and count as income, and that has the potential of “forcing” IRMAA on retirees as they age.
So to answer our terrific reader question: yes, Roth conversions can help here. You can use Roth conversions to shift the realization of income from high years to low years, preventing or mitigating IRMAA in the process.
But once more, make sure the juice is worth the squeeze.
If a 75-year-old has a $200,000 RMD that kills them on IRMAA, ask yourself: where does a $200,000 RMD come from? Answer: it’s coming from an IRA of over $5 million. Should someone with $5 million be losing sleep over IRMAA? I don’t think so.
That’s A Lot of Numbers…
A long and math-heavy article. I hope this helped you out! We covered:
Roth conversions can be objectively helpful, decreasing taxes in retirement and shifting large portions of portfolios from Traditional accounts (with potential taxes for heirs) into Roth accounts (no taxes for heirs)
Taxes in retirement are nuanced and interconnected. In today’s example, realizing extra income (via IRA distributions) also triggered extra Social Security taxes.
It’s not bad to leave behind Traditional assets to heirs. They’re getting a wonderful gift from you. But there will be taxes, which should be planned for.
There are many scenarios where it makes sense to pay taxes before you “have” to.
IRMAA is a negative reality for many retirees, but the people most likely to suffer IRMAA are also best positioned to deal with it.
Roth conversions can be used to mitigate IRMAA over the long run.
As always, thanks for reading!
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-Jesse
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Inside: Secure your financial future with insights into the top appreciating assets. Find the best appreciating assets and learn how to grow wealth with strategic investments.
Asset appreciation isn’t just an economic term; it’s the fuel that powers wealth creation. Think of appreciating assets as the golden geese, steadily laying valuable eggs that grow in size over time.
This is a crucial concept that triumphs and what you own can become the cornerstone of your financial success.
Asset appreciation isn’t just a buzzword; it’s the driving force behind significant wealth accumulation.
Whether you’re just starting or looking to expand your portfolio, understanding the role appreciation plays can mean the difference between mediocrity and staggering success.
Now, let’s dig in and help move your net worth higher.
What Are Appreciating Assets?
Appreciating assets are the golden geese of the investment world. They are the powerful engines that drive your net worth higher over time.
When you invest in assets like real estate, stocks, and even fine art, you’re placing a bet on their future value.
Unlike the car that loses value the moment you drive it off the lot, these assets typically gain worth, supernova-style, expanding your financial universe with every passing year.
How do assets appreciate in value?
Appreciation, at its core, is an asset’s journey from ‘worth X’ to ‘worth X and beyond’. But how does this magical wealth-building happen?
Several factors can give assets a financial boost.
For starters, the traditional law of supply and demand plays a huge role—if more people want it and there’s not enough to go around, the value goes up.
Toss in the influence of interest rates, economic growth, and geopolitical stability, and you have a mix that can push asset value into new echelons.
Even inflation can be a friend to assets, increasing their nominal value over time.
Remember, appreciation isn’t a given; it’s a hopeful trajectory bolstered by market forces and wise decision-making. You want to hop onto the appreciation train with assets that offer the promise of increasing in value, not just for now, but well into the future.
How to increase net worth with appreciating assets
Increasing your net worth with appreciating assets is like laying bricks for a financial fortress—it requires strategy, patience, and a mix of assets that have a history or strong potential for growth.
Start by assessing your current holdings and considering where you can diversify with assets that shine in appreciation prospects. It’s a game of balance, where you mix higher-risk, high-reward options with stable, gradual growers.
Make a habit of routinely re-evaluating your assets, keeping in mind economic trends and your personal goals. Sometimes, this may mean letting go of underperformers in favor of assets with brighter horizons.
Consider leveraging tax-advantaged accounts and investment strategies to maximize your wealth growth.
Most importantly, ensure liquidity so you can capitalize on new opportunities. Having liquid assets means you won’t miss out when the next big appreciating asset comes knocking.
Top 5 Appreciating Assets You Must Own
#1 – Stocks with High Growth Potential
Stocks are the daredevils of the investment world, particularly those brimming with high growth potential. They’re the kind that can catapult your net worth to the stratosphere if chosen wisely.
Tech giants like Nvidia, Microsoft, Google, Amazon, and Meta are testament to this—their growth over the decades has turned modest investments into fortunes.
Investing in high-growth potential stocks is like spotting a gem in the rough – if you spot the right ones, your financial prospects could shine brightly. You must learn how to invest in stocks for beginners.
Personally, I cannot stress how important it is to learn how to invest in the stock market as I can attest this is how you quickly grow your net worth.
Best For: Investors with a higher risk tolerance who are aiming for greater returns or dividend stocks and have the patience to weather market fluctuations.
#2 – ETFs to Streamline Investments for Optimal Performance
Exchange-Traded Funds (ETFs) are the investment world’s multitaskers, pooling the potential of various assets for optimum performance. By offering a diversified portfolio within a single share, they allow investors to spread their risk while reaping the growth benefits of different markets and sectors.
ETFs provide an easy and efficient way to diversify investments, reducing risk while still offering growth opportunities. They’re especially game-changing for those who prefer a “set and forget” strategy, as many ETFs are designed to passively track indexes or sectors. Many track the S&P, so you can easily invest in the overall market.
They’re cost-effective, often having lower fees than traditional mutual funds, and are accessible to investors with varying levels of experience.
Best For: Both beginners and experienced investors looking for a blend of simplicity, cost efficiency, and diversification in their investment strategy.
#3 – Real Estate: A Staple in Appreciating Assets
Real estate has long stood as a bulwark in the investment community, a reliable appreciator that doubles as both a tangible asset and a potential home. It’s a market marked by stability and a historical uptrend in value, making it a classic choice for those seeking long-term wealth growth.
Owning property is synonymous with the very concept of asset growth, with the power to withstand economic ebbs and flows. Location continues to be the drumbeat to its rise in value – a prime spot can transform a simple parcel into a gold mine.
Plus it is a tangible asset that provides utility and can serve as a hedge against inflation.
Whether it’s through REITs, crowdfunding platforms like Fundrise, or direct ownership, real estate can anchor your investment strategy on solid ground.
Best For: Investors seeking a tangible asset with a dual aim of long-term capital appreciation and passive rental property income. Ideal for those ready to manage properties or hire management, and for those who can handle the responsibilities of ownership.
#4 – Your Own Business: Betting on Your Entrepreneurial Spirit
Your own business isn’t just a job, it’s a reflection of your passion and an opportunity to control your financial destiny. When successfully executed, a business can become one of the most valuable appreciating assets, offering unparalleled autonomy and potentially substantial economic rewards.
Starting a business can lead to exponential wealth growth as the company expands and becomes profitable.
Your business’s value can significantly increase over time, making it a formidable asset in your net worth.
Owning a business is not just about the profits; it’s a journey of personal growth, resilience, and the triumph of turning passion into paychecks. It’s a path that can lead to great wealth, especially when one approaches it with clear strategy and unquenchable enthusiasm.
Best For: Individuals with entrepreneurial spirit, a viable business idea, and the readiness to invest time and capital into a long-term venture. Suitable for those who are tenacious and willing to face the challenges of entrepreneurship head-on.
#5- Self-Investment: The Ultimate Asset with Infinite Returns
Investing in yourself is like planting a seed that grows into a sturdy, towering tree, sheltering your financial future.
This investment can unlock doors to better opportunities, higher incomes, and greater job satisfaction. Whether it’s through education, health, or personal development, the returns on self-investment can be limitless.
Personal development often correlates with higher levels of personal and financial success.
Remember, when you invest in yourself, you become capable of crafting a life that not only brings in wealth but also contentment and a deeper sense of success.
Best For: Any individual seeking to enhance their career trajectory, entrepreneurship potential, or personal satisfaction. This approach is ideal for those who are committed to lifelong learning and self-improvement.
Other Examples of Appreciating Assets You Can Own
The Role of Bonds in a Diverse Securities
Bonds, those steadfast soldiers of the investment world, offer a buffer of safety amid the high-flying volatility of other assets. In a diversified portfolio, bonds contribute stability and predictable income, making them an essential element for many investor’s strategies.
They provide a fixed income stream with less volatility than stocks, acting as a cushion in economic downturns.
Bonds can offer a balance in investment holdings, mitigating risk and providing steady returns. Just make sure the returns are higher than an interest-bearing money market account.
Best For: Investors seeking to balance their portfolio with a lower-risk asset or those nearing retirement who prioritize income and stability over high growth.
Cryptocurrencies: The Digital Gold of Tomorrow?
Cryptocurrencies have emerged as the mavericks of appreciating assets, offering a wild ride with the allure of high-stakes jackpot payouts. As the “digital gold” of the modern era, they encapsulate the spirit of decentralization and technological innovation.
While their volatility can stir up investor heartbeats, their dramatic price appreciation stories make them impossible to ignore for those seeking the thrill of potentially explosive gains.
Even as the cryptocurrency markets continue to ebb and flow, they offer a unique proposition in wealth growth strategies—a high-risk, high-reward horizon that has many gazing toward the future with wallets in hand.
Best For: Tech-savvy investors with a high risk tolerance, seeking to diversify with a modern asset class that has considerable growth potential.
Fine Art and Collectibles: Value Beyond Beauty
Fine art and collectibles are not just a feast for the eyes; they’re also a banquet for your investment portfolio.
These assets bring value that transcends their aesthetic appeal, becoming cherished as cultural treasures and financial boons alike. With the intrinsic charm of rarity and historical significance, art pieces and collectibles can appreciate substantially over time, especially when curated with an expert eye.
For instance, this rare portrait of George Washington is expected to fetch $2.5 million at an upcoming auction.1
Best For: Connoisseurs with a passion for the arts or history, and investors looking for long-term, value-holding assets that also serve as cultural and personal investments. Ideal for those with substantial capital ready to navigate the less liquid markets.
Precious Metals: Why Gold and Silver Remain Attractive
Gold and silver aren’t just the treasures of lore—they’re enduring staples for those looking to fortify their wealth. Their allure lies in their history, intrinsic value, and the stability they can provide when economic tides turn tumultuous. Gold and silver are known for their resilience during economic downturns and inflationary periods. As such, learn how to invest in precious metals.
They are tangible, finite resources with universal value, often resulting in consistent demand.
Best For: Investors looking to hedge risks or seeking a stable store of wealth.
Prospects of Private Equity in Upcoming Markets
Private Equity (PE) forms the backbone for the next wave of market disruptors and innovators. Investing in private companies, especially in emerging markets, can yield substantial capital appreciation as these businesses grow and mature, sometimes well before they hit the public sphere.
This has significant potential for appreciation as companies scale up their operations and increase their market footprint.
Best For: Sophisticated investors with a high-risk tolerance and a long investment horizon. They typically have a significant amount of capital to invest and are looking for opportunities outside of public markets to achieve potential high returns.
Venture Capital’s Role in Shaping Future Wealth
Venture Capital (VC) is the financial catalyst that turns innovative startups into tomorrow’s industry leaders. By injecting capital into early-stage companies, VC not only generates the potential for staggering returns but also plays a critical role in shaping future markets and consumer trends.
It plays a critical role in shaping the business landscape of tomorrow by investing in innovation today. With its penchant for high-risk ventures, VC remains an appealing asset class for those with a futuristic vision who are keen to be part of the next big thing.
Venture capital isn’t merely about capital gains; it’s an embrace of progress, a stake in the evolution of industries, and a partnership with the brightest minds of a generation.
Best For: Investors who have a deep understanding of emerging markets and technologies, a high-risk tolerance, and the patience for long-term investment. Also ideal for those who wish to actively participate in the entrepreneurial process and impact the future direction of new businesses.
The Thriving Market for Vintage Automotive Collectibles
Vintage automotive collectibles are revving up the collectibles market with a roar.
Car enthusiasts and investors alike recognize that certain classic models don’t just retain their charm; they accelerate in value over time. The emotional connection, the engineering legacy, and the nostalgia factor turn these vehicles into appreciating assets with a personal touch.
Plus they offer a tangible investment that can be appreciated both visually and through the driving experience.
Best For: Auto enthusiasts who appreciate the craftsmanship of vintage models and are prepared for the hands-on involvement required. Most may see them as a collectible rather than an investment.
Sports Memorabilia as Lucrative Investments
Sports memorabilia takes you on a trip down memory lane, connecting you to pivotal moments and legends of the past. This nostalgia mixed with exclusivity propels their value, making them sought-after assets in the realm of investing.
The emotional and sentimental value tied to sports icons and historical moments can drive considerable investment interest and demand.
Best For: Sports fans who want to combine their passion with investment potential and like to show off their memorabilia.
Land: The Original Real Estate Investment
Land is the progenitor of all real estate investments, offering a blank canvas for potential development or holding value as a scarce resource. With an appeal that has stood the test of time, land remains one of the most fundamental appreciating assets in the investment portfolio.
It is a finite resource; they’re not making any more of it, so demand can only go up as supply remains constant.
Increases in development, population growth, and changes in land zoning can significantly enhance land value over time.
Best For: Investors seeking to hedge against inflation and looking at long-term growth prospects. Land is best for those who have the capital to invest without the need for immediate returns and can wait for the right opportunity to maximize their profits.
Commodities: A Staple in Diverse Investment Portfolios
Commodities offer a slice of the global economic pie, essential for their role in everyday life—from the grain in your breakfast cereal to the petroleum powering your car. As tangible assets, commodities can provide a buffer against inflation and diversify investment portfolios. A similar case could be made for trading currencies.
Commodities, including metals, energy, and agricultural products, often increase in value with inflation and global demand. They provide an investment route less correlated with the stock market, adding portfolio diversification.
Best For: Diversification seekers and those comfortable dealing with market fluctuations who understand global economic trends. Ideal for investors who wish to hedge against inflation and have an interest in tangible or sector-specific assets.
Navigating the High-Yield Savings Landscape
High-yield savings accounts have emerged as essential vehicles for preserving and modestly growing wealth.
In 2022-2024, with interest rates eclipsing their traditional counterparts, these accounts are more relevant than ever for savvy savers seeking to keep pace with inflation. They provide a safe haven for emergency funds or short-term financial goals while offering better returns than a typical savings account.
They provide a low-risk option to grow savings with the added convenience of liquidity. Just like certificates of deposit or CDs.
Best For: Individuals aiming for a secure, accessible place to save money with a better yield than traditional banking products. Especially well-suited for those starting to build their emergency funds or setting aside cash for near-term expenses.
Peer-to-Peer Lending – A Trend to Watch for Asset Growth
Peer-to-peer (P2P) lending shakes up traditional banking by directly connecting borrowers with investors through online platforms. This asset class is gaining traction, providing a novel way to potentially generate higher returns compared to traditional fixed-income investments.
P2P lending platforms offer higher returns on investment over standard savings, as you’re effectively acting as the bank.
It’s a cutting-edge way to diversify your investment portfolio beyond traditional stocks and bonds.
Best For: Investors looking for alternative income streams and who are comfortable with the risk associated with lending money.
Intellectual Property and Patents: An Overlooked Avenue for Wealth Creation
Owning the rights to an invention or unique creation can lead to a wealth of opportunities, with patents often being a gold mine for inventors and savvy investors alike.
Patents, in particular, hold the promise of a decade-long fruitful life, offering the potential for significant monetary returns through licensing or sales.
Best For: Inventors, entrepreneurs, and investors who are versed in industries where innovations are rapidly commercialized. It’s well-suited for those able to navigate the intricacies of patent law and capable of investing in the enforcement and marketing of their IP.
Alternative Investments: Unique Opportunities for Accredited Investors
Accredited investors have the advantage of accessing a broader range of alternative investments that may not be available to the general public, offering potentially higher returns and portfolio diversification. These can include private equity, hedge funds, and exclusive real estate deals.
It’s crucial, however, for accredited investors to conduct thorough due diligence and assess their risk tolerance when allocating a portion of their portfolio to these alternative assets.
Best For: Seasoned investors looking for diversification and higher risk-reward ratios and qualify as an accredited investor.
Luxury Goods: When Opulence Equals Investment
Luxury goods are not only symbols of status and opulence but can also solidify your investment game. High-end watches, designer handbags, and exclusive jewelry collections often see their value climb, defying the usual wear-and-tear depreciation.
They resonate with collectors and enthusiasts, transforming personal indulgence into a viable investment strategy.
Best For: Investors with a penchant for the finer things in life and enthusiasts looking to blend personal enjoyment with financial gain.
Secrets of the Antique Trade: Seeking Out Hidden
The antique trade is akin to a treasure hunt, where seasoned savvy meets the thrill of discovery. Unearthing hidden gems within flea markets, estate sales, and auction houses not only provides a historical connection but can also reveal investment diamonds in the rough.
Antiques carry the potential for significant bottom line appreciation due to factors like rarity, provenance, and desirability among collectors.
Like finding this antiquated nautical map at an estate sale and now listed for $7.5 million. 2
Best For: Collectors with a passion for history and an eye for value.
What If You Have A Depreciative Asset?
If you’re holding onto a depreciative asset, it’s like grasping a melting ice cube: time can whittle away its value.
Consider selling to repurpose the capital into something that appreciates, upgrading to a more efficient model, or simply using it fully before its value dips too low. Each depreciative asset requires a tailored strategy, balancing between cutting losses and extracting maximum utility.
It’s a strategic financial dance — knowing when to hold on and when to let go of depreciative assets can ensure they serve your bottom line more than they hurt it.
FAQs
Appreciating assets are financial powerhouses that grow your wealth over time. They combat inflation and can provide additional income streams.
By increasing in value, they enhance your net worth, creating a more robust financial foundation for your future endeavors.
Appreciating assets are typically categorized based on their nature and the way they generate value. Common categories include tangible assets like real estate and collectibles, financial assets like stocks and bonds, and intangible assets like patents and copyrights.
The assets that don’t often depreciate include real estate, precious metals like gold and silver, and certain collectibles such as fine art or vintage cars. These assets maintain value or appreciate over time, resistant to the typical wear and tear or technological obsolescence that affects other assets.
Which Asset that Has Appreciation in Value Interests You
In conclusion, adding appreciating assets to your portfolio is a strategic move towards achieving financial security and building long-term wealth.
These assets combat inflation by potentially increasing in value over time, providing an opportunity to earn returns that exceed the average inflation rate.
However, these assets are not considered to be part of your liquid net worth. With all appreciating assets, you must consider the potential taxes on your various investments.
To facilitate this wealth-building strategy, it’s vital to practice saving diligently—consider automating your savings, cutting unnecessary expenses, and increasing income streams. By consistently setting aside funds, you can gradually invest in diverse appreciating assets such as stocks, real estate, or retirement accounts.
This is how you start forming a life consistent with financial freedom.
Source
Barrons. “Rare Portrait of George Washington Could Fetch $2.5 Million at Auction.” https://www.barrons.com/articles/rare-portrait-of-george-washington-could-fetch-2-5-million-at-auction-e2f19134. Accessed February 20, 2024.
Los Angeles Times. “A $7.5-million find: Overlooked Getty estate sale map turns out to be 14th century treasure.” https://www.latimes.com/california/story/2023-10-25/map-dealer-discovers-14th-century-portolan-chart-getty-estate-sale. Accessed February 20, 2024.
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Stocks are shares of ownership in a company. To start investing in stocks, you would find a company that you like and think might grow in value and then purchase its stock through a brokerage account. If the stock price rises, you could sell your shares and potentially make a profit — or not if share prices decline.
Of course, when it comes to investing for beginners, you need to learn some basics to invest in stocks and do it well. Thanks to technology and various educational resources, you can get started using an app or online brokerage account and learn as you go. It has never been easier to build investing confidence as you gain experience. Here is a step-by-step guide for those who want to start investing in stocks now.
Key Points
• Stocks represent shares of ownership in a company and can be purchased through a brokerage account.
• Before investing in stocks, determine your investing approach and consider your time horizon.
• Different ways to invest in stocks include self-managed investing, using a financial advisor, or utilizing robo-advisors.
• The amount you invest in stocks depends on your budget and financial goals.
• Choose stocks based on thorough research, including analyzing a company’s financial statements and valuation metrics.
How to Start Investing in Stocks: 5 Steps
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1. Determine Your Investing Approach
Before you get started investing in stocks, you need to determine your investing approach. Because every person has unique financial goals and risk tolerances, there is no one-size-fits-all strategy to begin investing in the stock market.
Most people will need to decide whether they want a hands-on approach to investing or whether they’d like to outsource their wealth building to some sort of financial advisor.
Additionally, investors need to consider their time horizons before investing in stocks. Some investors want to invest long-term — buying and holding assets to build wealth for retirement. In contrast, other investors are more interested in short-term trading, buying and selling stocks daily or weekly to make a quick profit. The type of investor you want to be will help determine what kind of stocks you should buy and your investing approach.
The Different Ways to Invest in the Stock Market
Fortunately, various options are available for every type of investor as they begin to invest in stocks.
As mentioned above, some investors like to have a hands-on approach to investing. These investors want to make decisions on their own, picking what stocks are right for them and building a portfolio from the ground up. This self-managed strategy can be time-consuming but an excellent option for investors who have a general understanding of the markets or would like to learn more about them.
Other investors like to have experts, like a money manager, manage the investing process for them. While this investing approach may cost more than doing it yourself, it can be an ideal choice for individuals who do not have the time or energy to devote to financial decision-making.
2. Decide How Much you Will Invest in Stocks
How much you invest depends entirely on your budget and financial goals. Many financial experts recommend saving between 10% and 15% of your after-tax annual income, either in a savings account or by investing. With that guideline in mind, you may decide to invest with whatever you can comfortably afford.
Fortunately, it’s much easier to invest these days, even if you only have a few bucks at a time. Many brokerage firms offer low or no trading fees or commissions, so you can make stock trades without worrying about investment fees eating into the money you decide to invest.
Additionally, many brokerage firms offer fractional share investing, which allows investors to buy smaller amounts of a stock they like. Instead of purchasing one stock at the value for which the stock is currently trading — which could be $1,000 or more — fractional share investing makes it possible to buy a portion of one stock. Investors can utilize this to use whatever dollar amount they have available to purchase stocks.
For example, if you only have $50 available to invest and want to buy stock XYZ trading at $500 per share, fractional share investing allows you to buy 10% of XYZ for $50.
Asset Allocation
Asset allocation involves spreading your money across different types of investments, like stock, bonds, and cash, in order to balance risk and reward. Determining a portfolio’s asset allocation can vary from person to person, based on financial goals and risk tolerance.
Asset allocation is closely tied with portfolio diversification. Diversification means spreading one’s money across a range of assets. Generally, it’s like taking the age-old advice of not putting all your eggs in one basket. An investor can’t avoid risk entirely, but diversifying their investments can help mitigate the risk one asset class poses.
3. Open an Investment Account
Once you determine your investing approach and how much money you can invest, you’ll need to open a brokerage account to buy and sell shares of companies or whatever other assets you’d like to invest in.
Several investment accounts might make sense for you, depending on your comfort level in managing your investments and your long-term financial goals.
Professional option: Full-service brokerages
Many investors may use traditional brokerage firms, also known as full-service brokerages, to buy and sell stocks and other securities. A full-service brokerage offers additional services beyond just buying and selling stocks, such as investment advice, wealth management, and estate planning. Typically, full-service brokerages provide these services at high overall costs, while discount and online brokerages maintain scaled-down services with lower overall costs.
A full-service brokerage account may not be the best option for investors just getting started investing in stocks. These firms often require substantial account minimum balances to open an account. This option may be out of reach for most in the early stages of their investing journey.
Do-it-yourself option: Online brokerage
An online brokerage account is ideal for most beginning investors looking to have a hands-on approach to trading stocks and building a financial portfolio. Many online brokers offer services with the convenience of an app, which can make investing more streamlined. If you feel confident or curious about how to start investing at a lower cost than a full-service brokerage firm, opening an account with an online broker could be a great place to start.
Hands-off, automated option: Robo-advisor
If you’re interested in investing but want some help setting up a basic portfolio, opening an investment account with a robo-advisor might be best for you. A robo-advisor uses a sophisticated computer algorithm to help you pick and manage investments. These automated accounts generally don’t offer individual stocks; instead, they build a portfolio with a mix of exchange-traded funds (ETFs). Nonetheless, it’s a way to become more familiar with investing.
Retirement option: 401(k) and IRAs
Retirement accounts like employer-sponsored 401(k)s or individual retirement accounts (IRAs) are tax-advantaged investment accounts that can be great for the beginning investor trying to build a retirement nest egg. These accounts offer investors a range of investment choices, including individual stocks. You may also have access to tutorials, advisors, or other resources to help you learn how to start investing in these accounts.
💡 Ready to start retirement investing? Consider opening an IRA online.
Tip: Compare Costs and Features
No matter where you decide to open your investment account, be sure to research and compare costs and features within the account. For example, many brokerage accounts charge investment fees and commissions for making trades. Although investment costs can be quite low — and you can trade stocks without paying a commission — any investment fee can add up over time and ultimately reduce your overall investment returns.
Additionally, it helps to check if the investment account requires a minimum deposit to open an account. A minimum deposit can be a barrier to getting started for the beginning investor who doesn’t have much money to invest. However, many firms do not have minimum deposit requirements any longer.
4. Choose Your Stocks
Deciding what individual stocks to invest in can be challenging for most investors. There are countless ways to evaluate stocks before you buy.
Before choosing your stocks, you generally want to do a deep dive into a company’s inner workings to understand the company’s overall valuation and the stock’s share price.
As a beginning investor, you want to get comfortable reading a company’s balance sheet and other financial statements. All publicly-traded companies must file this information with the Securities and Exchange Commission (SEC), so you shouldn’t have trouble finding these financials.
One of the most fundamental metrics for understanding a stock’s value compared to company profits is its price-to-earnings (PE) ratio. Others include the price-to-sales (PS) ratio and the price/earnings-to-growth (PEG) ratio, which may be helpful for companies that have little to no profits but are expanding their businesses quickly.
These metrics, and other financial ratios, can help you determine what stocks to buy. And the advantage of owning individual stocks is that you can get direct exposure to a company you believe has the potential to grow based on your research. The downside, of course, is that investing doesn’t come with guarantees, and your stock’s value could decline even with thorough research.
💡 Recommended: 15 Technical Indicators for Stock Trading
5. Continue Building Your Portfolio
After you’ve decided what stocks to invest in, you generally want to continue building a portfolio that will help you meet your financial goals.
One way to bolster your portfolio is by buying mutual funds and ETFs rather than individual stocks. A benefit to investing in funds that hold stocks is that you can avoid some of the risks of being invested in individual stocks that may not perform well.
Whether investing in individual stocks or funds, you may want to consider the level of diversification in your portfolio that feels right for you. There is no consensus about the right way to diversify investments. For one person, ideal diversification could mean owning 20 stocks in different industries. For another, it could mean owning the “whole” market via a handful of mutual funds.
Once you get more comfortable investing in stocks and funds, you can employ numerous other investing strategies. You can add various securities, like bonds, commodities, and crypto, to your portfolio.
The Takeaway
Historically, investing in the stock market has been a way for some individuals to build personal wealth. These days, it’s never been easier for new investors considering getting into stocks to start. Whether you choose to work with a financial advisor or use an online broker or app, there are several ways to find a method that makes stock investing easy, fun, and potentially profitable. Of course, there are no guarantees, so it’s wise to take a step-by-step approach, start small if you prefer, do some research using the many resources available, and see what comes as you gain experience and confidence.
Investors can open an online investing account with SoFi Invest® to trade individual stocks, ETFs, or fractional shares with no commissions. Additionally, SoFi’s Automated Investing builds, manages, and rebalances portfolios with no SoFi management fee for those interested in investing in stocks through a more hands-off approach.
Start investing with your SoFi Invest account today.
FAQ
How do I invest $100?
You can invest $100 by opening an investing account that does not require a minimum account balance and purchasing shares of a stock or ETF that are less than $100. You can also use your funds to purchase fractional shares of whatever stocks you want to own.
How do I open a brokerage account?
You’ll need to take a few steps to open a brokerage account. First, you’ll need to find a broker that fits your needs. Once you’ve found a broker, you’ll need to complete an application and submit it to the broker. The broker will then review your application and, if approved, will open an account for you.
What is the S&P 500?
The Standard and Poor’s 500, commonly known as the S&P 500, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ stock exchanges. It is one of the most commonly followed stock market indices in the United States, along with the Dow Jones Industrial Average and Nasdaq Composite.
SoFi Invest® INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Stock Bits Stock Bits is a brand name of the fractional trading program offered by SoFi Securities LLC. When making a fractional trade, you are granting SoFi Securities discretion to determine the time and price of the trade. Fractional trades will be executed in our next trading window, which may be several hours or days after placing an order. The execution price may be higher or lower than it was at the time the order was placed. SOIN0622011
The VA home loan: Unbeatable benefits for veterans
For many who qualify, VA home loans are some of the best mortgages available.
Verify your VA loan eligibility. Start here
Backed by the U.S. Department of Veterans Affairs, VA loans are designed to help active-duty military personnel, veterans and certain other groups become homeowners at an affordable cost.
The VA loan asks for no down payment, requires no mortgage insurance, and has lenient rules about qualifying, among many other advantages.
Here’s everything you need to know about qualifying for and using a VA loan.
In this article (Skip to…)
Top 10 VA loan benefits
1. No down payment on a VA loan
Most home loan programs require you to make at least a small down payment to buy a home. The VA home loan is an exception.
Verify your VA loan eligibility. Start here
Rather than paying 5%, 10%, 20% or more of the home’s purchase price upfront in cash, with a VA loan you can finance up to 100% of the purchase price.
The VA loan is a true no-money-down home mortgage opportunity.
2. No mortgage insurance for VA loans
Typically, lenders require you to pay for mortgage insurance if you make a down payment that’s less than 20%.
This insurance — which is known as private mortgage insurance (PMI) for a conventional loan and a mortgage insurance premium (MIP) for an FHA loan — would protect the lender if you defaulted on your loan.
VA loans require neither a down payment nor mortgage insurance. That makes a VA-backed mortgage very affordable upfront and over time.
3. VA loans have a government guarantee
There’s a reason why the VA loan comes with such favorable terms.
The federal government guarantees these loans — meaning a portion of the loan amount will be repaid to the lender even if you’re unable to make monthly payments for whatever reason.
This guarantee encourages and enables private lenders to offer VA loans with exceptionally attractive terms.
4. You can shop for the best VA loan rates
VA loans are neither originated nor funded by the VA. They are not direct loans from the government. Furthermore, mortgage rates for VA loans are not set by the VA itself.
Instead, VA loans are offered by U.S. banks, savings-and-loans institutions, credit unions, and mortgage lenders — each of which sets its own VA loan rates and fees.
This means you can shop around and compare loan offers and still choose the VA loan that works best for your budget.
5. VA loans don’t allow a prepayment penalty
A VA loan won’t restrict your right to sell the property partway through your loan term.
There’s no prepayment penalty or early-exit fee no matter within what time frame you decide to sell your home.
Furthermore, there are no restrictions regarding a refinance of your VA loan.
You can refinance your existing VA loan into another VA loan via the agency’s Interest Rate Reduction Refinance Loan (IRRRL) program, or switch into a non-VA loan at any time.
6. VA mortgages come in many varieties
A VA loan can have a fixed rate or an adjustable rate. In addition, you can use a VA loan to buy a house, condo, new-built home, manufactured home, duplex, or other types of properties.
Or, it can be used for refinancing your existing mortgage, making repairs or improvements to your home, or making your home more energy-efficient.
The choice is yours. A VA-approved lender can help you decide.
Verify your VA loan eligibility. Start here
7. It’s easier to qualify for VA loans
Like all mortgage types, VA loans require specific documentation, an acceptable credit history, and sufficient income to make your monthly payments.
But, compared to other loan programs, VA loan guidelines tend to be more flexible. This is made possible because of the VA loan guarantee.
The Department of Veterans Affairs genuinely wants to make the loan process easier for military members, veterans, and qualifying military spouses to buy or refinance a home.
8. VA loan closing costs are lower
The VA limits the closing costs lenders can charge to VA loan applicants. This is another way that a VA loan can be more affordable than other types of loans.
Money saved on closing costs can be used for furniture, moving costs, home improvements, or anything else.
9. The VA offers funding fee flexibility
VA loans require a “funding fee,” an upfront cost based on your loan amount, your type of eligible service, your down payment size, and other factors.
Funding fees don’t need to be paid in cash, though. The VA allows the fee to be financed with the loan, so nothing is due at closing.
And, not all VA borrowers will pay it. VA funding fees are normally waived for veterans who receive VA disability compensation and for unmarried surviving spouses of veterans who died in service or as a result of a service-connected disability.
10. VA loans are assumable
Most VA loans are “assumable,” which means you can transfer your VA loan to a future home buyer if that person is also VA-eligible.
Assumable loans can be a huge benefit when you sell your home — especially in a rising mortgage rate environment.
If your home loan has today’s low rate and market rates rise in the future, the assumption features of your VA become even more valuable.
VA loan rates
The VA loan is viewed as one of the lowest-risk mortgage types available on the market.
Verify your VA loan eligibility. Start here
This safety allows banks to lend to veteran borrowers at lower interest rates.
Today’s VA loan rates*
Loan Type
Current Mortgage Rate
VA 30-year FRM
% (% APR)
Conventional 30-year FRM
% (% APR)
VA 15-year FRM
% (% APR)
Conventional 15-year FRM
% (% APR)
*Current rates provided daily by partners of the Mortgage Reports. See our loan assumptions here.
VA rates are more than 25 basis points (0.25%) lower than conventional rates on average, according to data collected by mortgage software company Ellie Mae.
Most loan programs require higher down payment and credit scores than the VA home loan. In the open market, a VA loan should carry a higher rate due to more lenient lending guidelines and higher perceived risk.
Yet the result of the Veterans Affairs efforts to keep veterans in their homes means lower risk for banks and lower borrowing costs for eligible veterans.
VA mortgage calculator
Eligibility
Am I eligible for a VA home loan?
Contrary to popular belief, VA loans are available not only to veterans, but also to other classes of military members.
Find and lock a low VA loan rate today. Start here
The list of eligible VA borrowers includes:
Active-duty service members
Members of the National Guard
Reservists
Surviving spouses of veterans
Cadets at the U.S. Military, Air Force or Coast Guard Academy
Midshipmen at the U.S. Naval Academy
Officers at the National Oceanic & Atmospheric Administration.
A minimum term of service is typically required.
Minimum service required for a VA mortgage
VA home loans are available to active-duty service members, veterans (unless dishonorably discharged), and in some cases, surviving family members.
To be eligible, you need to meet one of these service requirements:
You’ve served 181 days of active duty during peacetime
You’ve served 90 days of active duty during wartime
You’ve served six years in the Reserves or National Guard
Your spouse was killed in the line of duty and you have not remarried
Your eligibility for the VA home loan program never expires.
Veterans who earned their VA entitlement long ago are still using their benefit to buy homes.
The VA loan Certificate of Eligibility (COE)
What is a COE?
In order to show a mortgage company you are VA-eligible, you’ll need a Certificate of Eligibility (COE). Your lender can acquire one for you online, usually in a matter of seconds.
Verify your VA home loan eligibility. Start here
How to get your COE (Certificate of Eligibility)
Getting a Certificate of Eligibility (COE) is very easy in most cases. Simply have your lender order the COE through the VA’s automated system. Any VA-approved lender can do this.
Alternatively, you can order your certificate yourself through the VA benefits portal.
If the online system is unable to issue your COE, you’ll need to provide your DD-214 form to your lender or the VA.
Does a COE mean you are guaranteed a VA loan?
No, having a Certificate of Eligibility (COE) doesn’t guarantee a VA loan approval.
Your COE shows the lender you’re eligible for a VA loan, but no one is guaranteed VA loan approval.
You must still qualify for the loan based on VA mortgage guidelines. The guarantee part of the VA loan refers to the VA’s promise to the lender of repayment if the borrower defaults.
Qualifying for a VA mortgage
VA loan eligibility vs. qualification
Being eligible for VA home loan benefits based on your military status or affiliation doesn’t necessarily mean you’ll qualify for a VA loan.
You still have to qualify for a VA mortgage based on your credit, debt, and income.
Verify your VA loan eligibility. Start here
Minimum credit score for a VA loan
The VA has established no minimum credit score for a VA mortgage.
However, many VA mortgage lenders require minimum FICO scores of 620 or higher — so apply with many lenders if your credit score might be an issue.
Even VA lenders that allow lower credit scores don’t accept subprime credit.
VA underwriting guidelines state that applicants must have paid their obligations on time for at least the most recent 12 months to be considered satisfactory credit risks.
In addition, the VA usually requires a two-year waiting period following a Chapter 7 bankruptcy or foreclosure before it will insure a loan.
Borrowers in Chapter 13 must have made at least 12 on-time payments and secure the approval of the bankruptcy court.
Verify your VA loan home buying eligibility. Start here
VA loan debt-to-income ratios
The relationship of your debts and your income is called your debt-to-income ratio, or DTI.
VA underwriters divide your monthly debts (car payments, credit cards, and other accounts, plus your proposed housing expense) by your gross (before-tax) income to come up with your debt-to-income ratio.
For instance:
If your gross income is $4,000 per month
And your total monthly debt is $1,500 (including the new mortgage, property taxes and homeowners insurance, plus other debt payments)
Then your DTI is 37.5% (1500/4000=0.375)
A DTI over 41% means the lender has to apply additional formulas to see if you qualify under residual income guidelines.
VA residual income rules
VA underwriters perform additional calculations that can affect your mortgage approval.
Factoring in your estimated monthly utilities, your estimated taxes on income, and the area of the country in which you live, the VA arrives at a figure which represents your “true” costs of living.
It then subtracts that figure from your income to find your residual income (e.g. your money “left over” each month).
Think of the residual income calculation as a real-world simulation of your living expenses.
It is the VA’s best effort to ensure that military families have a stress-free homeownership experience.
Here is an example of how residual income works, assuming a family of four which is purchasing a 2,000 square-foot home on a $5,000 monthly income.
Future house payment, plus other debt payments: $2,500
Monthly estimated income taxes: $1,000
Monthly estimated utilities at $0.14 per square foot: $280
This leaves a residual income calculation of $1,220.
Now, compare that residual income to for a family of four:
Northeast Region: $1,025
Midwest Region: $1,003
South Region: $1,003
West Region: $1,117
The borrower in our example exceeds VA’s residual income standards in all parts of the country.
Therefore, despite the borrower’s debt-to-income ratio of 50%, the borrower could get approved for a VA loan.
Verify your VA loan eligibility. Start here
Qualifying for a VA loan with part-time income
You can qualify for this type of financing even if you have a part-time job or multiple jobs.
You must show a 2-year history of making consistent part-time income, and stability in the number of hours worked. The lender will make sure any income received appears stable. See our complete guide to getting a mortgage when you’re self-employed or work part-time.
VA funding fees and loan limits
About the VA funding fee
The VA charges an upfront fee to defray the costs of the program and make it sustainable for the future.
Veterans pay a lump sum that varies depending on the loan purpose and down payment amount.
The fee is normally wrapped into the loan. It does not add to the cash needed to close the loan.
Find out if you qualify for a VA loan. Start here
VA home purchase funding fees
Type of Military Service
Down Payment
Fee for First-Time Use
Fee for Subsequent Use
Active Duty, Reserves, and National Guard
None
2.3%
3.6%
5% or more
1.65%
1.65%
10% or more
1.4%
1.4%
VA cash-out refinance funding fees
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
2.3%
3.6%
VA streamline refinances (IRRRL) & assumptions
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
0.5%
0.5%
Manufactured home loans not permanently affixed
Type of Military Service
Fee for First-Time Use
Fee for Subsequent Uses
Active Duty, Reserves, and National Guard
1.0%
1.0%
VA loan limits in 2024
VA loan limits have been repealed, thanks to the Blue Water Navy Vietnam Veterans Act of 2019.
There is no maximum amount for which a home buyer can receive a VA loan, at least as far as the VA is concerned.
However, private lenders may set their own limits. So check with your lender if you are looking for a VA loan above local conforming loan limits.
Verify your VA loan eligibility. Start here
Eligible property types
Houses you can buy with a VA loan
VA mortgages are flexible about what types of property you can and can’t purchase. A VA loan can be used to buy a:
Detached house
Condo
New-built home
Manufactured home
Duplex, triplex or four-unit property
Find out if you qualify for a VA loan. Start here
You can also use a VA mortgage to refinance an existing loan for any of those types of properties.
VA loans and second homes
Federal regulations limit loans guaranteed by the Department of Veterans Affairs to “primary residences” only.
However, “primary residence” is defined as the home in which you live “most of the year.”
Therefore, if you own an out-of-state residence in which you live for more than six months of the year, this other home, whether it’s your vacation home or retirement property, becomes your official “primary residence.”
For this reason, VA loans are popular among aging military borrowers.
Buying a multi-unit home with a VA loan
VA loans allow you to buy a duplex, triplex, or four-plex with 100% financing. You must live in one of the units.
Buying a home with more than one unit can be challenging.
Mortgage lenders consider these properties riskier to finance than traditional, single-family residences, so you’ll need to be a stronger borrower.
VA underwriters must make sure you will have enough emergency savings, or cash reserves, after closing on your house. That’s to ensure you’ll have money to pay your mortgage even if a tenant fails to pay rent or moves out.
The minimum cash reserves needed after closing is six months of mortgage payments (covering principal, interest, taxes, and insurance – PITI).
Your lender will also want to know about previous landlord experience you’ve had, or any experience with property maintenance or renting.
If you don’t have any, you may be able to sidestep that issue by hiring a property management company. But that’s up to the individual lender.
Your lender will look at the income (or potential income) of the rental units, using either existing rental agreements or an appraiser’s opinion of what the units should fetch.
They’ll usually take 75% of that amount to offset your mortgage payment when calculating your monthly expenses.
VA loans and rental properties
You cannot use a VA loan to buy a rental property. You can, however, use a VA loan to refinance an existing rental home you once occupied as a primary home.
For home purchases, in order to obtain a VA loan, you must certify that you intend to occupy the home as your principal residence.
If the property is a duplex, triplex, or four-unit apartment building, you must occupy one of the units yourself. Then you can rent out the other units.
The exception to this rule is the VA’s Interest Rate Reduction Refinance Loan (IRRRL).
This loan, also known as the VA Streamline Refinance, can be used for refinancing an existing VA loan on a home where you currently live or where you used to live, but no longer do.
Check your VA IRRRL eligibility. Start here
Buying a condo with a VA loan
The VA maintains a list of approved condo projects within which you may purchase a unit with a VA loan.
At VA’s website, you can search for the thousands of approved condominium complexes across the U.S.
If you are VA-eligible and in the market for a condo, make sure the unit you’re interested in is approved.
As a buyer, you are probably not able to get the complex VA-approved. That’s up to the management company or homeowner’s association.
If a condo you like is not approved, you must use other financing like an FHA or conventional loan or find another property.
Note that the condo must meet FHA or conventional guidelines if you want to use those types of financing.
Veteran mortgage relief with the VA loan
The U.S. Department of Veterans Affairs, or VA, provides home retention assistance. The VA intervenes when a veteran is having trouble making home loan payments.
The VA works with loan servicers to offer loan options to the veteran, other than foreclosure.
Find out if you qualify for a VA loan. Start here
In fiscal year 2019, the VA made over 400,000 contact actions to reach borrowers and loan servicers. The intent was to work out a mutually agreeable repayment option for both parties.
More than 100,000 veteran homeowners avoided foreclosure in 2019 alone thanks to this effort.
The initiative has saved the taxpayer an estimated $2.6 billion. More importantly, vast numbers of veterans and military families got another chance at homeownership.
When NOT to use a VA loan
If you have good credit and 20% down
A primary advantage to VA home loans is the lack of mortgage insurance.
However, the VA guarantee does not come free of charge. Borrowers pay an upfront funding fee, which they usually choose to add to their loan amount.
The fee ranges from 1.4% to 3.6%, depending on the down payment percentage and whether the home buyer has previously used his or her VA mortgage eligibility. The most common fee is 2.3%.
Find out if you qualify for a VA loan. Start here
On a $200,000 purchase, a 2.3% fee equals $4,600.
However, buyers who choose a conventional mortgage and put 20% down get to avoid mortgage insurance and the upfront fee. For these military home buyers, the VA funding fee might be an unnecessary expense.
The exception: Mortgage applicants whose credit rating or income meets VA guidelines but not those of conventional mortgages may still opt for VA.
If you’re on the “CAIVRS” list
To qualify for a VA loan, you must prove you have made good on previous government-backed debts and that you have paid taxes.
The Credit Alert Verification Reporting System, or “CAIVRS,” is a database of consumers who have defaulted on government obligations. These individuals are not eligible for the VA home loan program.
If you have a non-veteran co-borrower
Veterans often apply to buy a home with a non-veteran who is not their spouse.
This is okay. However, it might not be their best choice.
As the veteran, your income must cover your half of the loan payment. The non-veteran’s income cannot be used to compensate for the veteran’s insufficient income.
Plus, when a non-veteran owns half the loan, the VA guarantees only half that amount. The lender will require a 12.5% down payment for the non-guaranteed portion.
The Conventional 97 mortgage, on the other hand, allows down payments as low as 3%.
Another low-down-payment mortgage option is the FHA home loan, for which 3.5% down is acceptable.
The USDA home loan also requires zero down payment and offers similar rates to VA loans. However, the property must be within USDA-eligible areas.
If you plan to borrow with a non-veteran, one of these loan types might be your better choice.
Explore your mortgage options. Start here
If you apply with a credit-challenged spouse
In states with community property laws, VA lenders must consider the credit rating and financial obligations of your spouse. This rule applies even if he or she will not be on the home’s title or even on the mortgage.
Such states are as follows.
Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin
A spouse with less-than-perfect credit or who owes alimony, child support, or other maintenance can make your VA approval more challenging.
Apply for a conventional loan if you qualify for the mortgage by yourself. The spouse’s financial history and status need not be considered if he or she is not on the loan application.
Verify your VA loan home buying eligibility. Start here
If you want to buy a vacation home or investment property
The purpose of VA financing is to help veterans and active-duty service members buy and live in their own home. This loan is not meant to build real estate portfolios.
These loans are for primary residences only, so if you want a ski cabin or rental, you’ll have to get a conventional loan.
If you want to purchase a high-end home
Starting January 2020, there are no limits to the size of mortgage a lender can approve.
However, lenders may establish their own limits for VA loans, so check with your lender before applying for a large VA loan.
Spouses and the VA mortgage program
What spouses are eligible for a VA loan?
What if the service member passes away before he or she uses the benefit? Eligibility passes to an unremarried spouse, in many cases.
Find and lock a low VA loan rate today. Start here
For the surviving spouse to be eligible, the deceased service member must have:
Died in the line of duty
Passed away as a result of a service-connected disability
Been missing in action, or a prisoner of war, for at least 90 days
Been a totally disabled veteran for at least 10 years prior to death, and died from any cause
Also eligible are remarried spouses who married after the age of 57, on or after December 16, 2003.
In these cases, the surviving spouse can use VA loan eligibility to buy a home with zero down payment, just as the veteran would have.
VA loan benefits for surviving spouses
Surviving spouses have an additional VA loan benefit, however. They are exempt from the VA funding fee. As a result, their loan balance and monthly payment will be lower.
Surviving spouses are also eligible for a VA streamline refinance when they meet the following guidelines.
The surviving spouse was married to the veteran at the time of death
The surviving spouse was on the original VA loan
VA streamline refinancing is typically not available when the deceased veteran was the only applicant on the original VA loan, even if he or she got married after buying the home.
In this case, the surviving spouse would need to qualify for a non-VA refinance, or a VA cash-out loan.
A cash-out mortgage through VA requires the military spouse to meet home purchase eligibility requirements.
If this is the case, the surviving spouse can tap into the home’s equity to raise cash for any purpose, or even pay off an FHA or conventional loan to eliminate mortgage insurance.
Qualifying if you receive (or pay) child support or alimony
Buying a home after a divorce is no easy task.
If, prior to your divorce, you lived in a two-income household, you now have less spending power and a reduced monthly income for purposes of your VA home loan application.
With less income, it can be harder to meet both the VA Home Loan Guaranty’s debt-to-income (DTI) guidelines and the VA residual income requirement for your area.
Receiving alimony or child support can counteract a loss of income.
Mortgage lenders will not require you to provide information about your divorce agreement’s alimony or child support terms, but if you’re willing to disclose, it can count toward qualifying for a home loan.
Different VA-approved lenders will treat alimony and child support income differently.
Typically, you will be asked to provide a copy of your divorce settlement or other court paperwork to support the alimony and child support payments.
Lenders will then want to see that the payments are stable, reliable, and likely to continue for another 36 months, at least.
You may also be asked to show proof that alimony and child support payments have been made in the past reliably, so that the lender may use the income as part of your VA loan application.
If you are the payor of alimony and child support payments, your debt-to-income ratio can be harmed.
Not only might you be losing the second income of your dual-income households, but you’re making additional payments that count against your outflows.
VA mortgage lenders make careful calculations with respect to such payments.
You can still get approved for a VA loan while making such payments — it’s just more difficult to show sufficient monthly income.
VA loan assumption
What is VA loan assumption?
One benefit for home buyers is that VA loans are assumable. When you assume a mortgage loan, you take over the current homeowner’s monthly payment.
Verify your VA loan home buying eligibility. Start here
That could be a big advantage if mortgage rates have risen since the original owner purchased the home. The buyer would be able to acquire a low-rate, affordable loan — and it could make it easier for the seller to find a willing buyer in a tough market.
VA loan assumption savings
Buying a home via an assumable mortgage loan is even more appealing when interest rates are on the rise.
For example:
Say a seller-financed $200,000 for their home in 2013 at an interest rate of 3.25% on a 30-year fixed loan
Using this scenario, their principal and interest payment would be $898 per month
Let’s assume current 30-year fixed rates averaged 4.10%
If you financed $200,000 at 4.10% for a 30-year loan term, your monthly principal and interest payment would be $966 per month
Additionally, because the seller has already paid four years into the loan term, they’ve already paid nearly $25,000 in interest on the loan.
By assuming the loan, you would save $34,560 over the 30-year loan due to the difference in interest rates. You would also save roughly $25,000 thanks to the interest already paid by the sellers.
That comes out to a total savings of almost $60,000!
How to assume (take on) a VA loan
There are currently two ways to assume a VA loan.
The new buyer is a qualified veteran who “substitutes” his or her VA eligibility for the eligibility of the seller
The new home buyer qualifies through VA standards for the mortgage payment. This is the safest method for the seller as it allows the loan to be assumed knowing that the new buyer is responsible for the loan, and the seller is no longer responsible for the loan
The lender and/or the VA needs to approve a loan assumption.
Loans serviced by a lender with automatic authority may process assumptions without sending them to a VA Regional Loan Center.
For lenders without automatic authority, the loan must be sent to the appropriate VA Regional Loan Center for approval. This loan process will typically take several weeks.
When VA loans are assumed, it’s the servicer’s responsibility to make sure the homeowner who assumes the property meets both VA and lender requirements.
VA loan assumption requirements
For a VA mortgage assumption to take place, the following conditions must be met:
The existing loan must be current. If not, any past due amounts must be paid at or before closing
The buyer must qualify based on VA credit and income standards
The buyer must assume all mortgage obligations, including repayment to the VA if the loan goes into default
The original owner or new owner must pay a funding fee of 0.5% of the existing principal loan balance
A processing fee must be paid in advance, including a reasonable estimate for the cost of the credit report
Find out if you qualify for a VA loan. Start here
Finding assumable VA loans
There are several ways for home buyers to find an assumable VA loan.
Believe it or not, print media is still alive and well. Some home sellers advertise their assumable home for sale in the newspaper, or in a local real estate publication.
There are a number of online resources for finding assumable mortgage loans.
Websites like TakeList.com and Zumption.com give homeowners a way to showcase their properties to home buyers looking to assume a loan.
With the help of the Multiple Listing Service (MLS), real estate agents remain a great resource for home buyers.
This applies to home buyers specifically searching for assumable VA loans as well.
How do I apply for a VA loan?
You can easily and quickly have a lender pull your certificate of eligibility (COE) to make sure you’re able to get a VA loan.
Most mortgage lenders offer VA home loans. So you’re free to shop and compare rates with just about any company that catches your eye.
Getting a VA loan for your new home is similar in many ways to securing any other purchase loan. Once you find an ideal home in your price range, you make a purchase offer, and then undergo VA appraisal and underwriting.
VA appraisal ensures that the home meets its minimum property requirements (MPRs) and is structurally sound and safe for occupancy.
What’s more, VA-specific mortgage lenders are actually some of the highest-rated (and lowest-priced) on the market. Here are a few we’d recommend checking out.
Time to make a move? Let us find the right mortgage for you
Middle-income Americans who are 75 and older are at serious risk of a retirement crisis, according to a new research brief from the National Opinion Research Center (NORC) at the University of Chicago.
“Our cumulative research has projected an impending crisis without a clear policy solution: a majority of middle-income older adults will be unlikely to afford needed care and housing in the next decade, potentially challenging their ability to age with dignity, choice, and independence,” the researchers stated.
Financial disparities are also varied across a series of racial and ethnic groups, the researchers found. Cohort members who are also people of color typically face larger disparities than their white counterparts. In 2020, people of color represented about 12% of the middle-income older adult population in the U.S., a figure that is expected to more than double to 25% by 2035.
“The largest shift in composition is among Hispanics, who will comprise nearly 11 percent of the middle-income group in 2035 — nearly a three-fold increase from 2020,” the researchers found.
Compounding the concerns about housing this population could face are the kinds of assets that older, middle-income people of color typically have.
“Black and Hispanic older adults tend to hold fewer liquid assets than white older adults,” the brief states. “Holding fewer liquid assets makes it more difficult to access the housing and care options that align with their preferences.”
For this analysis, researchers examined the asset portfolios of middle-income older adults. They found that those “who do not qualify for Medicaid often must rely on other sources of income, such as pensions or retirement accounts, to afford the care and housing options they need or want.”
Having more liquid assets could make housing and health care easier and more affordable for them, but that’s not necessarily an easy transition for many to make — especially among people of color, the researchers found.
“33 percent of Black and Hispanic older adults’ asset portfolios comprise transportation items like a personal vehicle,” the brief said. “Liquidizing a vehicle is both inconvenient and impractical as it eliminates a source of independence in a society increasingly dependent on private vehicle access.”
Earning returns can be exhilarating. But it’s important to remember that they don’t necessarily represent the money that goes in the bank. Commissions, taxes, and other fees impact the returns any investor makes on their investment.
Just how big a bite these investment expenses take out of an investor’s assets isn’t always instantly clear. But by understanding the fees they pay, and the taxes they’re likely to owe, investors can better plan for the money they’ll actually receive from their investments. And they can also take concrete steps to minimize the effects of fees and taxes.
Investment Expenses 101
There are a few different types of investment expenses an investor may come across as they buy and sell assets. Here are the most common ones.
Fund Fees
Mutual funds are a very popular way for investors to get into the market. They’re the vehicles that most 401(k), 403(b), and IRAs offer investors to save for retirement. But these funds charge fees, starting with a management fee, which pays the fund’s staff to buy and trade investments.
Investors pay this fee as a portion of their assets, whether the investments go up or down. (With employer-sponsored retirement accounts, the employer may cover the fees as long as the account holder is employed by the company.) Management fees vary widely, with some index funds charging as little as .10% of an investor’s assets. But other mutual funds may charge more than 2%.
In addition to the management fee, the fund may also charge for advertising and promotion expenses, known as the 12b-1 fee. Plus, mutual fund investors may have to pay sales charges, especially if they buy funds through a financial planner, or an investment advisor. While the maximum legal sales charge for a mutual fund is 8.5%, the common range is between 3% and 6%.
One way to understand how much of a bite these mutual fund fees take out of an investment on an annual basis is to look at the expense ratio. 💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
Advisor Fees
Investors may also face fees when they hire a professional to help manage their money. Some advisors charge a percentage of invested assets per year. More recently, some advisors have simplified the cost by simply charging an hourly fee.
Broker Fees and Commissions
Even investors who want to manage their own portfolios typically pay a broker for their services in the form of fees and commissions. These fees and commissions may be based on a percentage of the transaction’s value, or they may be rolled into a flat fee. Another factor that may influence the fee: whether an investor uses a full-service broker or a discount broker.
How to Minimize the Cost of Investing
No matter how an investor approaches the market, they can expect to pay some fees. It’s up to each individual to decide whether or not those fees are worth it. For some, paying a professional for hands-on advice is worth the extra annual 1% fee (or more) of their invested assets. For others, minimizing costs may be a priority. Among many options, there are a few investing opportunities that stand out as relatively low-cost.
Index Funds
When investing in mutual funds, one type of fund has established itself as the least expensive in terms of fees: Index funds. That’s because these funds track an index instead of paying analysts and managers to research and trade securities. When it comes to index funds vs. managed funds, proponents typically cite the lower fees.
Automated Investing Platforms
People seeking investing advice or guidance who don’t want to pay typical fees might want to explore automated investing platforms, also known as “robo-advisors.” Some of these platforms charge annual advisory fees as low as .25%. That said, these platforms often use mutual funds, which charge their own fees on top of the platform fees.
Discount Brokerage
Investors who manage their own portfolio may opt for a discount or online brokerage. These brokers tend to charge flat fees per trade as low as $5, with account maintenance fees also often as low as $0 to $50 per account.
How Taxes Eat into Investing Profits
There are typically two kinds of taxes that investors have to worry about. The first is income tax, and the second is capital gains tax. In general, income taxes apply to investment earnings in the form of interest payments, dividends, or bond yields. Capital gains, on the other hand, apply to the returns an investor realizes when they sell a stock, bond, or other investment. (The exception: The IRS taxes short-term investments, which an investor has held for less than a year, at that investor’s marginal income tax rate.)
By and large, capital gains tax rates are lower than income tax rates. Income tax rates for high-earners can be as high as 37%, plus a 3.8% net investment income tax (NIIT). That means the taxes on those quick gains can be as high as 40.8%—and that’s not including any state or local taxes.
The taxes on long-term capital gains are lower across the board. For tax year 2023, for investors who are married filing jointly and earning less than $89,250, the capital gains tax rate is 0%. It goes up depending on income, with couples making between $89,250 and $553,850 paying 15%, and those with income above that level paying 20%.
For tax year 2024, those who are married and filing jointly with taxable income up to $94,050 have a capital gains tax rate of 0%. Couples making between $94,050 and $583,750 have a rate of 15%, and those with income above that have a tax rate of 20%. 💡 Quick Tip: Automated investing can be a smart choice for those who want to invest but may not have the knowledge or time to do so. An automated investing platform can offer portfolio options that may suit your risk tolerance and goals (but investors have little or no say over the individual securities in the portfolio).
Strategies to Minimize Taxes
There are a few ways an investor can minimize the impact of taxes on their investments. One popular way to take advantage of the tax code is by investing through a retirement plan, such as a 401(k), 403(b), or IRA. All of these plans encourage people to save for retirement by offering attractive tax breaks.
For tax-deferred accounts like a 401(k) or traditional IRA, the tax break comes on the front end. Retirees will have to pay income taxes on their withdrawals in retirement. On the other hand, retirement accounts like a Roth 401(k) or Roth IRA are funded with after-tax dollars, and money is not taxed upon withdrawal in retirement.
Another approach some investors may want to consider is tax-loss harvesting. This strategy allows investors to take advantage of investments that lost money by selling them and taking a capital loss (as opposed to a capital gain). That capital loss can help investors reduce their annual tax bill. It may be used to offset as much as $3,000 in non-investment income.
The Takeaway
Fees and taxes typically do have an impact on an investor’s returns on investments. How much they eat into profit varies, and is largely dependent on what the investments are, how they are being managed, and how long an investor has had them. Other factors include the investor’s income level, and whether they’ve also lost money on other investments.
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Precious metals have captured the attention of investors for centuries, not only for their alluring beauty but also for their potential as a valuable asset. Whether you’re intrigued by the gleam of gold, the sheen of silver, or the rarity of metals like platinum and palladium, the world of precious metals investing offers a diverse and captivating landscape to explore.
While investing in precious metals may seem intimidating at first, understanding the basics can help you make informed decisions about your investment strategy. From the different types of precious metals available to the various investment vehicles and strategies, this beginner’s guide will provide you with a solid foundation to begin exploring this captivating investment opportunity.
Precious metals have held an allure for thousands of years, treasured not only for their beauty but for their unique physical properties. The high economic value of these metals, coupled with their distinct characteristics, makes them essential in various sectors, including the jewelry industry, electronics, industrial products, and the computer industry.
Gold
Gold is perhaps the most well-known precious metal, treasured by civilizations across history for its malleability, beauty, and resistance to tarnish. Today, gold is not only used in jewelry but also in electronics and other industrial applications due to its excellent conductivity.
Silver
Silver, while less expensive than gold, is highly valued for its unique properties. It has the highest electrical and thermal conductivity of all the elements, making it indispensable in the electronics industry. Silver is also used in solar panels, batteries, and various industrial applications.
Platinum and Palladium
These are part of the platinum group metals, prized for their exceptional resistance to heat, chemical attack, and electrical erosion. They are used extensively in the automotive industry, jewelry making, and numerous industrial applications.
Investing in precious metals provides several potential benefits, making them an enticing addition to any personal finance strategy.
Hedge against Inflation: Precious metals, particularly gold, have been used as a hedge against inflation for centuries. When fiat currencies are losing value due to inflation, gold prices often rise, preserving the purchasing power of the investor’s capital.
Wealth preservation: Precious metals, being tangible assets, have been used for wealth preservation across history. Unlike paper money, physical gold or silver cannot be devalued by government actions or economic downturns, making them a valuable asset in times of economic uncertainty.
Market volatility buffer: Precious metals often move counter to the stock market, making them an ideal investment for mitigating risk during times of turbulence.
Investing in precious metals can provide balance to your portfolio, potentially offering protection and positive performance during periods of economic stress.
There’s more to investing in precious metals than buying gold bars or silver coins. Here are some of the ways you can add precious metals to your portfolio:
Physical Bullion
Physical bullion includes gold and silver coins, bars, and rounds. When you buy physical precious metals, you’re making a direct investment and gaining ownership of a tangible asset. This option appeals to many investors who appreciate the security of holding their wealth in a physical form that has intrinsic value.
However, owning physical metals comes with considerations such as storage and insurance costs. You’ll need to secure your investment either in a home safe or a deposit box at a bank or private facility, each option with its advantages and disadvantages.
Precious Metal ETFs and Mutual Funds
Precious metal exchange-traded funds (ETFs) and mutual funds offer a way to gain exposure to the precious metals market without the need to physically store the metals. These funds typically track the price of a specific metal or a group of metals.
Mining Stocks
By buying shares in a mining company, you’re investing in the operation that extracts the precious metals from the ground. Mining stocks can offer higher potential returns than investing in physical metals or metal-tracking funds, but they also come with greater risk.
These risks include operational risks at the mining site, geopolitical risks in the countries where mines are located, and market risks related to fluctuations in the prices of the underlying metals.
Futures Contracts and Other Financial Instruments
Futures contracts allow you to buy or sell a specific amount of a precious metal at a predetermined price at a set date in the future. These instruments can be used to hedge against price fluctuations or to speculate on future price movements.
Other financial instruments, such as options and certificates, can also be used to invest in precious metals, but these can be complex and are typically recommended for more experienced investors.
Buying and Storing Precious Metals
When it comes to buying precious metals, the process can be as simple as visiting a local coin shop or making a purchase online. However, there are several key factors to consider:
Choosing a Dealer
Reputation is critical when choosing a dealer for your precious metals purchase. Look for businesses with a long track record, positive customer reviews, and a commitment to transparency in their pricing. Keep in mind that while precious metals themselves are not subject to counterfeiting, the products made from them can be, so it’s essential to buy from reputable sources.
Understanding Premiums Over Spot Price
When you buy precious metals, you’ll often pay more than the current market price, or “spot price,” of the metal. This difference is known as the “premium” and covers the dealer’s expenses and profit margin. Premiums can vary depending on the product; for example, a gold bullion coin may have a higher premium than a gold bullion bar of the same weight due to the additional cost of minting the coin.
Buying Process
Depending on the dealer, the buying process may involve placing your order online or over the phone, followed by payment through bank transfer, check, or credit card. Be aware that using a credit card may involve additional fees. After payment, the dealer will ship your precious metals to you, with the shipping method and insurance coverage varying by dealer.
Storage Options
If you’re investing in physical precious metals, you’ll need to consider where to store them. At home, a high-quality safe can provide protection, but it may also make your home a target for thieves. Storing your precious metals in a bank deposit box provides an extra level of security, though access to your metals is limited to the bank’s hours, and the contents of the box may not be insured by the bank.
Private storage facilities, sometimes called private vaults or depositories, offer another option. These facilities offer high-security storage for precious metals, often with 24/7 monitoring, insurance coverage, and the option to visit and inspect your holdings.
Selling Precious Metals
Knowing when and how to sell your precious metals is just as important as knowing how to buy them. Here are a few points to keep in mind:
Timing Your Sale
While there are many theories about the best time to sell precious metals, the reality is that the optimal timing depends on your individual circumstances and financial goals. It can be helpful to set a target price or return percentage at which you’ll sell your metals and to review this strategy regularly based on market conditions and your financial situation.
Finding a Buyer
Most precious metals dealers also buy metals, and selling to a dealer can be a convenient option, particularly if you’re selling a common product like a gold coin. However, dealers will typically offer to buy your metals at below the spot price, as they need to account for their costs and a profit margin when they resell the metals.
Online marketplaces and auction sites can offer another way to sell your metals, potentially allowing you to reach a larger pool of buyers and secure a higher price. However, these platforms also involve fees and potentially longer transaction times.
Tax Implications
In many jurisdictions, selling precious metals can trigger capital gains tax implications. The tax treatment can depend on several factors, including the type of metal, the form of the metal (coin, bar, etc.), how long you’ve held the metal, and your total gain or loss on the sale. It’s essential to consult with a tax professional to understand the potential tax implications of your sale.
Risks and Challenges in Precious Metal Investment
While investing in precious metals can offer several benefits, it also comes with its own unique risks:
Price volatility: Like other commodities, precious metals can experience significant price fluctuations. While these fluctuations can offer the potential for high returns, they can also lead to substantial losses.
Lack of cash flow: Unlike stocks that may pay dividends or bonds that pay interest, precious metals do not generate cash flow. Any return on your investment will come from selling the metal at a higher price than you paid for it.
Storage and insurance costs: If you choose to invest in physical precious metals, you’ll need to consider the costs of storing and insuring your metals. These costs can eat into your returns, particularly if you’re investing a small amount.
Counterfeit products: Although it’s rare, there is a risk of counterfeit products in the precious metals market. This risk can be mitigated by purchasing from reputable dealers and having your metals tested by a professional if you’re unsure of their authenticity.
Despite these challenges, many investors find that the potential benefits of investing in precious metals make them a valuable addition to a diversified investment portfolio.
Precious Metals in Portfolio Diversification
Precious metals can play a key role in a diversified investment portfolio. Their tendency to move independently of other asset classes can provide a buffer against market volatility. While the percentage of precious metals in a portfolio can vary greatly depending on individual investment objectives and risk tolerance, some financial advisors suggest an allocation of between 5-15% towards precious metals.
It’s important to remember that diversification does not ensure a profit or protect against a loss, and past performance of precious metals is not indicative of future results. It’s always a good idea to consult with a financial advisor to help determine the most appropriate asset allocation for your individual circumstances.
Precious Metals and Global Industry
The demand for precious metals extends beyond individual investors and central banks. These metals play a crucial role in various industries globally.
Gold, for instance, is highly valued in the electronics industry for its excellent conductivity and resistance to tarnish. Silver’s unique properties make it indispensable in the production of solar panels, batteries, and various industrial applications. Platinum and palladium are critical in the automotive industry for their use in catalytic converters, helping to reduce harmful emissions.
As technological advancements continue, the industrial demand for precious metals may potentially increase, influencing market prices.
Precious Metals and Retirement
Precious metals can also play a role in retirement planning. Certain types of Individual Retirement Accounts (IRAs) allow for the inclusion of physical precious metals, known as “Gold IRAs” or “Precious Metals IRAs.”
These IRAs can provide a way to gain the potential benefits of precious metals while enjoying the tax advantages of an IRA. However, there are specific rules and regulations regarding which precious metals can be included in these IRAs, and how they must be stored.
Before adding precious metals to a retirement account, it’s important to understand the potential risks and rewards and to consult with a financial advisor and a tax professional.
Final Thoughts
Investing in precious metals can be a valuable part of your overall financial strategy. As with any investment, it’s crucial to do your research, understand your investment objectives, and consider consulting with a financial advisor.
In the ever-evolving world of precious metals, continual learning and staying abreast of market trends is key. While no investment is risk-free, these rare metals, with their rich history and diverse industrial uses, offer unique opportunities for those willing to pursue their lustrous allure.
Whether it’s the glint of gold, the shine of silver, or the rarity of other metals like platinum and palladium, the precious metals market offers a fascinating way to diversify your portfolio. And they can potentially protect against volatile markets and inflation, and invest in a tangible asset with enduring value.
In the end, the choice to invest in precious metals is a personal one. It’s about understanding the market, acknowledging your risk tolerance, and aligning your investment strategy with your financial goals. The key to investing in anything successfully lies in knowledge, diversification, and patience.
No matter your interest rates or cash flow, your retirement account or your credit risk, the world of precious metal offers a robust platform for investment purposes. Remember, past performance is not indicative of future results, and every investment strategy comes with its own unique risks. But with careful planning and wise decision-making, you can make the most of what precious metals have to offer.
Whether you’re buying gold bars, investing in mining companies, tracking the gold industry, or just diversifying your portfolio with a valuable asset, there’s a place for you in the world of precious metals investing.
From gold coins to silver prices, from market volatility to economic uncertainty, the precious metals sector offers a world of opportunities. And as the world continues to evolve, so too will the role of precious metals in our lives and in our portfolios.
Investing in precious metals is not just about protecting against potential economic collapse, but also about participating in the growth and technological advancements of global industries. It’s about owning a piece of history, a tangible asset that has served as a symbol of wealth and power for thousands of years.
So, as you contemplate whether to invest in precious, remember the words of ancient Greek playwright Aristophanes, “Gold bestows honor, gold inspires deeds, gold characterizes the highest.” May your journey into investing in precious metals be a golden one.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:
Learn investment and tax strategies to help you achieve financial security and prepare for a prosperous retirement.
How can you balance saving for emergencies and investing for the future? What strategies can you employ to maximize your tax benefits and build a secure financial future? NerdWallet’s Kim Palmer and Alana Benson discuss investment strategies and tax planning to help you understand how to navigate your financial journey effectively. They begin with a discussion of investment strategies, with tips and tricks on understanding different investment accounts like 401(k)s and IRAs, leveraging compound interest, and the importance of starting investments early. Then, Alana discusses tax planning and filing in-depth, covering the intricacies of different tax forms like W-4s and W-2s, the significance of estimated taxes for freelancers, and strategies for managing capital gains taxes.
Kim and Alana delve into retirement planning and the challenges of active versus passive investing. They provide a framework for prioritizing your finances, emphasizing the creation of an emergency fund, taking advantage of employer 401(k) matches, and understanding the role of asset allocation based on age and risk tolerance. Additionally, they tackle the decision-making process in personal finance, such as choosing between paying off debt and investing, and the pros and cons of having a financial advisor.
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Episode transcript
This transcript was generated from podcast audio by an AI tool.
Sean Pyles:
Hey listener, we’ve got a special episode in store for you today. Our investing and tax Nerds recently hosted a webinar going deep into how you can level up your investing and tax strategy. So we packaged that up into a podcast episode for you. The Nerds talk about what you need to know about different investing accounts, how to get help with your taxes and more. So here’s the webinar.
Kim Palmer:
Welcome everyone. I am Kim Palmer. I’m a personal finance writer at NerdWallet where we help people make smart decisions. One important note, we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. NerdWallet Inc is not an investment advisor or broker and does not provide personal financial advisory services. Today we are excited to talk to you about the basics of investing and taxes and we think we have some helpful info to share with you. You can always find more at nerdwallet.com or on the NerdWallet app. Our goal today is to kick off a helpful discussion about investing and tax information and tools. Alana Benson writes about investing topics including stocks, funds, and ethical investing. And now I will hand it over to Alana.
Alana Benson:
Thanks Kim. Hi everyone. Thank you for joining us today. So before we start, I just want to say a couple of things that often get forgotten when we’re talking about investing. So first, investing usually comes second to some other goals. If you’re having a hard time paying for necessities or you don’t have an emergency fund, it’s really important to focus on those things before we even start worrying about investing. Second, instead of scrimping, try to increase your income. So I didn’t start investing until I was in my late 20s, and that’s because one, I didn’t work at NerdWallet yet, so I literally didn’t know anything. And two, I was making around $25,000 a year, so I didn’t have much expendable income. And when you don’t have extra income, it’s really hard to prioritize investing and it just might not even be a good idea to do that.
When I started making more money, it was suddenly a lot more possible for me to invest for retirement. So if it’s possible for you and you want to be investing more, look for jobs that will pay you more or look into side hustles, but cutting back on your streaming services probably will not save you enough money for retirement. And finally, if you don’t have the money to invest now, that’s totally fine. Some people have serious money anxieties and others just don’t have the cash. Whatever your reason is, don’t stress too much about it. Just keep learning and when you’re able to, you can start investing. So why do we invest? What is the point of all this? And the answer is that it’s because we like money and that’s okay. There’s no shame in admitting it, I like money, most people like money. It’s because money isn’t just money. It’s not like Scrooge McDuck diving into pools of money and buying Maseratis. It’s not that.
It’s about not being stressed about your money all the time and it’s about being able to buy everything that you need and some stuff that you want comfortably without having money stress take up all of your energy. Money allows us to thrive instead of just survive and investing helps you make more money than you could ever possibly make just by working at a job. So okay, what actually is investing? This whole process is very strange. Okay. Investing is the process of money that you already have making additional money for you. And this works through what’s called compound interest. Compound interest means that your gains get a little bit bigger every year and that’s also why starting when you’re younger gives you a huge advantage and more money in the long run. So for example, you just start at that little number one in the box up there. Say you buy an investment for $100, if it goes up the average stock market return of 10%, it could then be worth $110, meaning that you’ve made $10.
Then that $10 that you earned also starts earning compound interest on top of the $100 you initially invested. That doesn’t sound like much of a profit, but imagine if you were doing it with way larger amounts of money over a way longer period of time. Now that 10% is an annualized rate, which means that you’re not going to get 10% every single year. In all likelihood, some years you’re going to finish up, some years you’ll finish down. But over the course of decades when you average all that out, you tend to get about 10%. The way you actually start investing is through an investing account. And there’s a couple of different types, but the type of investment account you have is actually really, really important because a lot of them have some pretty significant tax benefits that you want to take advantage of. So you’ve got your 401(k)s and these are offered through your employer. You add money to it and sometimes your employer matches it. So it’s basically free money. If you have a 401(k), you’ll likely choose your investments from a pre-selected list or a fund that will automatically adjust itself over time.
So this means 401(k)s are typically very hands off. IRAs on the other hand are investment accounts that you open up yourself. IRAs can be opened online through brokerages and actually at a lot of large banks, they also do that. So it’s likely you can open up an investment account just through your bank. Unlike with a 401(k), IRAs you’ll have to choose your own investments in those accounts. You may have heard about a thing called a Roth IRA or a Roth 401(k) and it’s good if you know the difference. So with a Roth, you pay taxes on your money now just like any other money that you earn and then the money you have invested inside that account grows tax-free and you can take it out tax-free in retirement. With a traditional IRA or 401(k), the money you contribute today is pre-tax.
So that is you get to deduct it from your income taxes this year. So it’s like a nice little treat this year, but then when you cash it out in retirement, you’ll owe income taxes on it. This is really, really important. I’ve seen a lot of people make this mistake. Your investment account is not an investment, so a Roth IRA, a 401(k), not an investment. So if you have a Roth IRA, that’s great, but that doesn’t mean you’re actually invested in anything. So you fund your investment account and then you buy investments from there. But I’ve heard of people opening a Roth IRA, putting in a bunch of money and then wondering why it didn’t grow over the last 10 years. So you have to purchase investments for your money to actually grow and if you don’t do it, you’ll miss out on all of those years of growth, so very important.
And there’s a couple different types of investments that you can choose from once you open and fund your investment account. So you’ve got stocks, I’m sure everyone’s heard of that, these are shares of ownership in companies and the way you make money from them is if they go up in value and some pay you a cut of the company’s profits on a regular basis. Then you’ve got bonds. This is when you loan money to companies or the government and they pay you interest. Funds, now these are very exciting because they’re basically just baskets of stocks and bonds that you buy all at once. So a fund is still a stock or bond based investment depending on the type of fund that you get. And there’s a lot of different kinds such as index funds or exchange traded funds and mutual funds, but they’re all collections of investments that you buy at one time.
And I think funds are pretty awesome because if you own a stock and that company goes out of business, you lose all of your money. But if you invest in a fund that covers 100 stocks and that same stock goes out of business, your investment is buoyed up by the other 99 companies. So again, all of these investments, stocks, bonds and funds, you buy them from your investment account and then you own them in there. All right, so let’s talk about the stock market, it’s this weird nebulous term that’s hard to understand. But the stock market is just where people buy and sell investments, but now people just trade investments online. So the stock market is made up of several what are called market indexes. Now these are basically just predetermined lists of companies and the performance of that overall list can tell us a lot about the health of the US economy.
So for example, the S&P 500, something you probably have all heard of, that’s just the list of 500 of the largest publicly traded companies in the US and it includes companies like Apple and Amazon. So when we say the stock market is down today, that means that on average most of those companies aren’t doing well. And you can’t invest in the literal stock market, but you can invest in funds that include all the same investments. So these are called index funds because they track a market index. So again, if you have an S&P 500 index fund, it should perform pretty closely to how the S&P 500 itself is actually performing. The S&P 500 goes up 10% a year on average and 6.5% after inflation. And this is just an average, so some years the market goes up more, some years it goes down less, but when done well, investing can potentially mean doubling your money every few years for doing basically nothing, which is my favorite way of earning money, by doing nothing. It’s great.
So let’s talk strategy. This is all about the way that you invest, when you put your money in and when you take your money out. So passive investing is where you buy that S&P 500 index fund and you keep adding money into it until you retire. It’s very boring, but it’s effective. So it can give you that 10% return on average over the long haul, but a lot of people want to make more than that 10%, and they do so by actively buying and selling stocks, crypto options and other high risk investments. They try to predict when they’ll be low, then they buy them and then they turn around and try to sell them when they’re high. So these people are called active traders or day traders. Only 20% of active traders make money over a six-month period. That is not a lot of people.
There have been a lot of studies over the years that show that active investing is a way less lucrative fashion than boring old passive investing with that index fund. Plus active investing is a lot more work, you have to do all kinds of research and you keep an eye on the markets and you can hypothetically earn more by actively trading versus passively earning the same amount as that historical return of 10%. But most people end up making less when they actually try it, and that’s because people are really bad at predicting things. And in order to make money on the overall stock market over the long term, you have to be really good at predicting things all the time. So maybe you make it big on one stock, but the odds of that happening again and again are very low. So let’s put all of this information together, the accounts, the actual investments and the strategy.
Here’s how financial advisors suggest you prioritize your money when you’re starting to invest. So the first thing you want to do is you’re not actually going to invest at all. The first thing is that you’re going to have an emergency fund. So this is money that you won’t actually put in the stock market, and that’s because when your money is invested, its value can change day by day. So say you have $1,000 and you want to use it for an emergency fund, but you invest it, when you have to fix something on your car suddenly, you go to check your money and its value could be $600 instead of $1,000 and that’s not good. If you put it in a high yield savings account, you can access that money at any time without risking its value. Plus right now the interest rates are really high.
So your money could be earning 4 to 5% just by sitting there. So next, you want to get that 401(k) match if it’s available to you because it’s free money. After that, it’s a good idea to look into IRAs. Both IRAs and 401(k)s have what’s called a contribution limit, which is just the maximum amount of money you can put in each of them every year. If you’re able to max out an IRA, then it’s a good call to move back to your 401(k). And the reason you switch around like that is because of the way the tax benefit works. So it’s likely more beneficial to invest in an IRA over a 401(k) if you’ve already gotten your match, if you have to choose between the two. Then if you max out your 401(k), you can move to a standard brokerage account. And this is not a list of everything you have to be doing right now.
You might be thinking, “Whoa, maxing out an IRA is $6,500, I cannot afford that”, and that is totally fine. So I like to picture it as a waterfall. So when you fill up your emergency fund, then you can start working on getting that 401(k) match. Only after that bucket is full should you then move on to investing in an IRA and so on. And wherever you’re at in your bucket filling journey is okay. It’s just nice to know what to do next when you’re ready for it. So we already talked about what accounts to invest from and the investments you can buy, but then do you just start buying a bunch of index funds or stocks or bonds? How do you know how much of each investment to get? And that is all about risk tolerance. And to understand that we have to understand how risk works over time.
If you’re investing for retirement and you’re in your 20s now, that means you have a ton of time for your investments to grow and then drop dramatically and then rise back up. So financial advisors would say you can afford to take on a bit more risk, AKA invest in riskier investments, because you have time for your investments to bounce back. Now, if you’re investing for your retirement and you’re 65, you don’t want to risk all the money you’ve been investing for years and years because you’re going to actually need to use it to pay for stuff in retirement pretty soon, so you want to protect it. And figuring out how much of each investment you should have is a fancy term called asset allocation, but it just means how much of your portfolio is in which of these investments.
And age is just a number, but typically when you’re younger, you may be able to afford to take more risk because you have more time for the stock market highs and lows to even out. So stocks, and okay, remember index funds and mutual funds are often made up of stocks so those count too, but those tend to carry more risk than investments like bonds. And an example of a 20-year-old’s investment portfolio, which includes all of your accounts so your 401(k), your Roth IRA, all of that together, that could be 100% stocks. And that’s fairly risky, but those 20 year olds are not going to retire for a long time. Now, a 65-year-old might have way more bonds because they don’t want to risk all that money they’ve earned over time. And one thing some investors do to mitigate risk is to slowly shift their asset allocation from high risk investments to low risk investments over time.
And again, I’m not a financial advisor and this is not personalized investment advice, but how much of each investment it’s good to have will usually depend on how much risk you are willing to take. And an investment portfolio can be really simple or really complicated. So you could have that one S&P 500 index fund and you purchase it from a Roth IRA, and that’s just all you do. Just if you want to keep it really simple or you can make it more complicated. So maybe you explore several stock-based funds such as international stocks and healthcare stocks and technology stocks, and you could invest in those types through a fund. So instead of buying 30 technology stocks, you just have one technology stock fund, then a small slice in bonds, and then an even smaller slice is crypto or other high risk investments. Though financial advisors have varying opinions on the safety of crypto.
So keep in mind, this is just an example and not necessarily what you should do personally, but it is really helpful to look up asset allocation portfolios through an online brokerage and see what they recommend for your specific age and when you plan on retiring. You can also talk with a financial advisor who can help guide you through those decisions. And investing is great because it can help you earn wealth, which you could spend on a boat, but more than likely one of your biggest investing goals will be retirement. And the sad truth is that in some things like retirement, they just cost so much that you’ll probably never afford them just by putting money in a savings account. And that’s why we say we have to invest for retirement. And the truth is that most people just aren’t saving enough for retirement.
So you’ll probably have a lot of expenses and you have to pay for that in retirement and some of it’s necessary like food or housing or medical care and some of it is travel or bucket list stuff, but you may not be working anymore or at least not as much as you were. And once you factor in inflation, it’s likely that a dollar today will be worth way less when you’re in retirement. And saving for retirement has gotten even more difficult because you can’t necessarily afford to live on social security. Medicare doesn’t always pay for your health needs and pensions aren’t really as common as they used to be. And because of all this, it’s really important to start investing for retirement sooner rather than later.
And if you’re early in your career, it might seem silly to worry about retiring right now, but if you start investing sooner, you actually spend less on retirement than if you start investing later in life overall and that’s because of compound interest. So our retirement calculator shows that if you start putting away $100 per month, that could grow to nearly $400,000 in 35 years. And it’s always good to know how much you should be trying to invest. When you have a long-term goal in mind, you want to know what that number is. So a retirement calculator can be a big help to figure that out, including NerdWallet’s retirement calculator. No shame, I’m going to plug it, but some financial advisors recommend saving 15% of your pre-tax income for retirement. So okay, let’s break that down. What does that look like?
So if you make $100,000 a year, again just because easy math, that would be $15,000 annually that you’re trying to save for retirement. But if you had a 5% match on your 401(k), you’d already be saving $10,000 a year between the $5,000 you make and the $5,000 your employer puts in. And then if you contributed another $5,000 to your Roth IRA, you’d already meet your target goal of saving $15,000 a year for retirement. You should also think about how much you can make during those peak earning years. If you’re younger, what career are you looking to have? You can look up what those wages tend to look like on a site like Glassdoor or ask someone in your life who is in that career path, and maybe do that tactfully because you’re asking about money. But figuring out what you want to be when you grow up may not be something you want to think about right now.
But to be honest, I studied English in college and no one told me about my job prospects. I figured that I would have to write a super famous book or be a teacher and you don’t have to have everything figured out now, but it doesn’t hurt to see how much a potential field could earn and figure out what careers are open to you. And just keep in mind that relationship between your earnings and investing like we talked about in the beginning. And if you’re later in your career, it is harder to take advantage of compound interest, but some of those investment accounts have those catch up contributions that we talked about so you’re able to contribute more after a certain age. Thank you all so much for listening to me talk very fast for a long time, and now I will hand it back over to Kim to talk about taxes. Thanks so much.
Kim Palmer:
Great, thank you so much, Alana. That was great. Someone actually asked in a pre-submitted question, “Why do I have to pay taxes?” Well, here is why. Taxes are used to pay for a lot of different things like clean water, roads, schools, healthcare, and the military. And your tax return is due every year in mid-April to the IRS. We’ll talk a little bit later about what to do if you need an extension, but in general that is the deadline. But first, let’s back up a little bit. When you file taxes, there is so much paperwork. One really important one is the W-4. That is the document that your employer asks you to fill out when you start a new job. And it plays a really big role in telling your employer how much in taxes to take out of each paycheck. It asks you things like your filing status, dependents, how much tax to withhold, and if you get a really big tax bill or a big refund, then you might want to go back and revisit your W-4 just to make sure you’re withholding enough but not too much.
There’s also the W-2, which is a document that your employer sends you to summarize how much in total they took out of your paycheck the previous year, and you’ll need to reference all those numbers when you file your tax return. If you are self-employed or you work a side hustle, then taxes won’t be automatically withheld from your paycheck, and that means you might have to pay something called estimated taxes, which is typically four times a year. In January, you’ll get something called a 1099 form that outlines how much money any company paid you, and then you’ll use that information when you file your return. And then finally, the 1040 is the main form you use when you file taxes, and we’ll drop a link in the chat for more about that. Okay, so you have all of your forms set. How do you actually file your taxes?
You can do it yourself through the IRS. You can use an online tax prep software or you can use a tax professional like an accountant or a tax preparer. If you do it on your own, you can either use paper forms or get access to brand name tax prep software through an IRS service called Free File. But it’s important to know that only people who make below a certain income qualify for the Free File program. If you use tax software like TurboTax, H&R Block or NerdWallet Taxes powered by Column Tax, many of these providers use a Q&A style to help you do your taxes and some even offer paid upgrades that connect you directly to a tax professional. If your finances are really complicated and you want some extra help, then you can also work with a tax preparer such as a certified public accountant.
You do want to make sure to ask them lots of questions and check their credentials before you agree to share your financial information. And you also want to check to see if they have a prepared tax identification number, which is an ID that’s required for anyone who files tax returns for compensation. The US does not have a flat tax system, and that means that portions of your income can be taxed at different rates. There are currently seven tax rates for federal income taxes that run from 10% to 37%. And which tax rate applies to you depends on your income and your filing status. So you might hear people say, “I’m in the 12% bracket” or “I’m in the 22% bracket”, but being in a tax bracket doesn’t mean you pay that tax rate on everything you make. And in reality, people’s income can fall into several different tax brackets depending on how much they make.
Portions or chunks of your income are taxed at different rates and some of those different taxes are then added together. So for example, some of your income could be taxed at a rate of 10%, another chunk could be at 12%. The more you make, the higher the tax rate might be on some of your income. And depending on the state where you pay your income taxes, you might pay a flat rate or a progressive rate similar to the federal structure. A small handful of states have no state income tax. If you want to pay less, you can look for tax breaks. Tax credits and tax deductions are two tools that can help you potentially minimize your tax bill, but they do work in different ways. Tax deductions reduce your taxable income. As a simplified example, a $25,000 tax deduction on $100,000 of taxable income means that only $75,000 of that income will get taxed.
Tax credits directly reduce your tax bill by the value of their credit. So this means if you owe $2,000 in taxes and you’re eligible for a $1,000 tax credit, you’ll end up owing $1,000. Tax credits tend to be more valuable because they have the potential to pack a bigger punch, so you definitely want to try to take all the tax credits you qualify for, and you could even get money back if a credit is refundable. Common tax credits include the earned income tax credit, the child tax credit, the lifetime learning credit, and the American opportunity credit and savers credit.
All right, I alluded to this at the beginning, but what happens if you’re not going to be ready by mid-April? What do you do? If you know you won’t be able to file on time before tax day, you can file for a free extension with the IRS and that gives you until mid-October to file your return. But you want to make sure that at least 90% of what you think you’ll owe in April is covered by an estimated tax payment or your withholdings. Otherwise, the IRS can hit you with a penalty for late payment. The failure to pay penalty is really no joke. It’s 0.5% of your unpaid taxes each month your payment is late plus interest. If you file late and you did not file an extension, you could also get hit with a failure to file penalty, which is 5% of your unpaid taxes each month that your payment is late. There is some good-ish news, if you file late but you don’t owe anything, you won’t get penalized but that doesn’t mean you’re not still obligated to file.
If you don’t, the IRS could file a return on your behalf and you might miss out on a refund if you’re owed one. And if your tax bill is so high that you can’t pay it off, you do have options. You can set up a long-term or short-term payment plan with the IRS.
I know that was a whole lot of information and taxes can seem scary, but we break down lots of popular tax questions and terms on nerdwallet.com. We have some time to address some pre-submitted questions from the audience ranging from about Roth IRAs to the pros and cons of having a financial advisor. And I do want to give a reminder here as we answer these questions that we are not tax or investing advisors. We are writers who focus on these fields and what we say is not investing or tax advice. So with that said, let’s dive into these questions. A question that came to us in an email was: how do you choose between paying off credit card debt and investing in saving for emergencies?
I really love this question because I think it speaks to some of the biggest challenges of personal finance, navigating these choices. And the answer is it’s really up to you. Many financial advisors say that the first step is to create a starter emergency fund, and you can read more in our article that we’ll link to, Should I Pay Off Debt Or Save? And you’ll see most people think about saving $500 to $1,000 first and then after that to consider contributing enough to a workplace retirement plan if they have access to one, and then contributing 3% to 5% of income to an IRA or a Roth IRA. And then financial advisors say people can consider focusing on paying off high interest debt and amp up investing efforts once they have paid that off. And now Alana, I’ll turn over to you. Perhaps you can answer the questions about Roth IRAs.
Alana Benson:
Absolutely. So a couple folks were wondering, before we went over everything, what a Roth IRA is and how does it work and when is it worth it to open one? So we already covered this a little bit, but again, it’s an individual retirement account and it lets you contribute money that you’ve already paid taxes on. So think about when you get your paycheck. That money has already had taxes taken out of it. So once you hit age 59 and a half and you have held the Roth IRA for at least five years, you can withdraw your contributions and any earnings, which is a fancy word for money that you earn from investing, without paying taxes again. And whether it’s worth it is up to you, especially if you’re trying to decide between a Roth IRA and a traditional IRA because it’s about when you pay those taxes and if you have a traditional IRA, you do get that tax break right now.
So that’s a personal decision. But you can also take out money tax-free from your Roth IRA later in life. So if that’s something that you are really trying to parse out, it might be good to talk to a financial advisor because they can help you with that question. We had two other questions. The first one is: how do you calculate how much money to put in your Roth IRA if you make over the maximum amount? So we didn’t actually cover this, so Roth IRAs do have income limits, but there is something called a Backdoor Roth that lets you contribute money first to a traditional IRA, pay taxes on it and then roll that money into a Roth IRA. And then our last question is: what are the pros and cons of having a financial advisor and how do you find one?
This is such a good question. The pros and cons really depend on your situation. The catchall term ‘financial advisor’ is used to describe a wide variety of people and services, including investment managers, financial consultants, financial planners. First and foremost, you always want to verify a financial professional because financial advisor doesn’t require people to be vetted. Certain things like a certified financial planner or a CFP, those actually have a very high level of education and have a certification that you can verify online. So anyone that you are talking about money with, you want to make sure that you are vetting them. And some of these people can just talk to you about your finances and some of them can actually manage your investments for you if you want that. Financial advisors, depending on the kind that you choose, can be pretty expensive. A robo-advisor is like an AI version of a financial advisor.
You just set up an account for one and then they charge you a pretty modest fee. And based on your age and your risk tolerance, it will manage your investments for you. An online financial advisor can offer more services and you can actually talk to a human being, but those do tend to cost a little bit more. And then you could go to an in-person financial advisor, depending on their credentials, that might cost even more, but sometimes it’s really nice to talk to somebody that you know and you can grow that relationship with them over time.
Kim Palmer:
Great. Thank you, Alana. And I think, actually, I can squeeze in one more question that we received. How do taxes work with investment accounts? How much do we set aside so we aren’t surprised by a tax bill? Which is a great question. If you’re selling stocks from a brokerage investment account, then you should be aware of three words, capital gains taxes. Those are the taxes you’ll pay when you sell assets for profit. Assets that you have owned for more than a year are subject to long-term capital gains tax, and the capital gains tax rate is 0%, 15% or 20% on most assets. Capital gains taxes on assets held for a year or less are subject to short-term capital gains. If you regularly trade stocks or other investments, you might be subject to short-term capital gains.
Those profits are taxed as ordinary income based on your tax brackets, which we went over before. Your final tax bill depends on a number of different factors. If you don’t want to be surprised, estimate what you’ll owe using tools such as a tax calculator or IRS worksheets. If needed, consider setting aside enough to cover the tax bill or paying estimated taxes and as always, your specific situation will differ and we are not tax professionals. We hope that you enjoyed this webinar and learned something today. If you’d like to get even more clarity on your finances and continue learning with NerdWallet, consider signing up for an account with us at nerdwallet.com. Thank you so much for joining us.
Sean Pyles: And that’s all we have for this episode. To send the Nerds your money questions, call or text us on the Nerd hotline at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected]. Here’s our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This webinar episode was produced by Alikay Wood, Sheri Gordon, and me. We had editing help from Liz Weston, Sara Brink mixed our audio, and a big thank you to NerdWallet’s editors for all their help. And with that said, until next time, turn the Nerds.
If you had $20,000, how would you spend it? One of the smartest things you could do if you suddenly came into an extra $20,000 – or managed to save that much money over time – would be to invest it. But where? And how?
The right answer differs for everyone and depends on your financial objectives, comfort level with risk, and time horizon. This guide illuminates 10 ideal ways to invest $20,000 and maximize your returns.
Set Your Investment Goals and Assess Your Risk Tolerance
Establishing clear financial objectives and measuring your tolerance for risk should serve as the cornerstone of your investment decisions. For instance, if you’re eyeing retirement, long-term investments like stocks or real estate might be right up your alley. Conversely, if your goal is to accumulate funds for a house down payment in five years, safer options like a high yield savings account may be more appealing.
Risk tolerance plays an equally critical role. If the thought of market volatility unsettles you, safer options with lower returns might suit you better. But if you can handle a higher level of risk for the prospect of higher returns, you might explore riskier ventures like individual stocks or even cryptocurrencies. A consultation with an in-person financial advisor can help you decipher your financial goals and risk tolerance.
10 Best Ways to Invest $20K
As you prepare to grow your $20k investment, an array of options awaits. Your financial goals, risk tolerance, and timeline will guide you to the ideal choice. Here are 10 ways to strategically invest your $20k:
1: High-Yield Savings Accounts
High-yield savings accounts are a low-risk, steady-growth choice for those looking to invest $20k. They offer more competitive interest rates than traditional savings accounts, meaning your money works harder for you. The Federal Deposit Insurance Corporation (FDIC) protects these accounts, offering an additional layer of security and peace of mind.
This investment route is particularly beneficial if you prefer having your emergency fund accessible, or if you’re saving for near-term goals. Despite the returns being lower than riskier investment options, the safety and stability they provide make high-yield savings accounts an attractive option for many investors.
2: Bitcoin
Bitcoin has emerged as a prominent player in the investment world, offering a high-risk, high-reward dynamic that appeals to some investors. The value of Bitcoin is notoriously volatile, yet its remarkable growth cannot be ignored.
Over the past decade, Bitcoin has experienced gains exceeding 5,700%, significantly outpacing traditional markets like the NASDAQ, which had a gain of 336% over the same period. Even within a five-year timeframe, Bitcoin still came out ahead with a 96% increase compared to the NASDAQ’s 69%.
Given its digital nature and decentralized structure, investing in Bitcoin can be complex and fraught with unique risks. Unlike traditional currencies, Bitcoin operates independently of a central bank. Furthermore, its value is susceptible to sharp fluctuations influenced by a variety of factors, including market demand, investor sentiments, regulatory news, and macroeconomic trends.
Ready to dive into Bitcoin investing? Consider Swan Bitcoin, where you can easily set up recurring buys or make instant purchases right from your bank account.
3: Stock Market Investing
Stock market investing is a viable path for those seeking to grow their $20k investment, especially for long-term financial goals. Today’s investing apps make it easy to start investing with as little as $1 and to diversify your investments with fractional shares if you desire.
When considering individual stocks, potential returns can be substantial, but they often come with a higher level of risk. By holding a variety of stocks across different sectors and regions, a diversified portfolio can help mitigate these risks, providing a buffer against market volatility.
As an investor, it’s important to remember that past performance doesn’t guarantee future results. The stock market has demonstrated remarkable growth over time, but it’s not immune to periods of downturn. Staying resilient and maintaining a long-term perspective can help you deal with these fluctuations.
4: Mutual Funds and Exchange-Traded Funds (ETFs)
Mutual funds and ETFs offer investors an easy way to diversify their portfolios. These funds allow investors to buy a stake in a wide range of stocks and bonds, spreading the risk and potentially improving the returns over time.
Financial institutions manage mutual funds and ETFs, charging management fees for the expertise they provide in managing and selecting the assets within the funds. While mutual funds often require a significant initial investment, ETFs are more accessible for investors, as most brokerage firms offer a wide variety of ETFs with no minimum investment requirements.
Index funds, a subtype of mutual funds or ETFs, aim to replicate the performance of a specific market index, such as the S&P 500. These types of funds are a popular choice among passive investors due to their typically lower management fees compared to actively managed funds. The strategy of mimicking the market rather than attempting to outperform it allows investors to enjoy broad market returns while keeping costs low.
5: Bonds and Treasury Securities
For more conservative investors, bonds and Treasury securities offer a safer, lower-yield alternative. When you purchase a bond, you’re essentially loaning money to a corporation or government entity. In return, you receive interest payments over a specified period and the return of the principal amount at the bond’s maturity.
Treasury securities are a type of bond issued by the U.S. government, widely regarded as one of the safest investment vehicles. For broader exposure, bond ETFs and bond mutual funds allow you to diversify across different types of bonds, reducing the impact of any single bond defaulting.
6: Robo-Advisors
For those who prefer a hands-off approach to investing, robo-advisors can be an excellent option. These digital platforms create and manage your investment portfolio using sophisticated algorithms, taking into account factors such as your risk tolerance, investment goals, and time horizon.
Robo-advisors typically charge lower fees than traditional financial advisors, making them a cost-effective choice, especially for beginners or those with simpler financial situations. They offer a straightforward path to diversification and automatic portfolio rebalancing, reducing the need for constant monitoring and manual adjustments. It’s an appealing solution for those looking to invest $20k while minimizing time and effort spent on investment management.
Most robo-advisor platforms offer exposure to stocks, bonds, ETFs, and mutual funds.
7: Real Estate Investing
Real estate has proven to be a lucrative asset class for many investors. Income-producing real estate, like rental properties, can generate a steady flow of rental income, with potential property appreciation over time. However, property management can be time-intensive and comes with additional costs such as maintenance and property taxes.
If the idea of becoming a landlord doesn’t appeal to you, you might want to consider investing in real estate investment trusts (REITs). These publicly-traded companies own, operate, or finance income-producing real estate, allowing you to dip your toes into real estate without the hassle of managing properties.
8: Peer-to-Peer Lending
Peer-to-peer lending, an alternative form of investing, involves lending money to individuals or small businesses through online platforms that match lenders with borrowers. As an investor, you can potentially enjoy higher returns than those offered by traditional savings or money market accounts. However, this approach comes with its own set of risks, including the risk of borrower default.
To safeguard against potential losses from defaults, it’s wise to diversify your lending across different borrowers. This practice, similar to diversification in a stock portfolio, can help spread the risk, increasing your chances of overall success.
9: Investing in a Small Business or Start-up
Investing in a small business or a start-up offers an opportunity to potentially reap significant returns. However, it is a high-risk venture and typically requires becoming an accredited investor. As an accredited investor, you’ll need to meet specific income and net worth criteria, emphasizing the fact that this investment option is not for everyone.
Due to the inherent risk, this investment path should only be considered if you’re financially secure enough to withstand potential losses. Remember, while investing in a burgeoning business can be lucrative, it could also result in losing your entire investment.
10: Education and Skill-Building
Often overlooked in investment discussions, investing in yourself through education and skill-building can offer meaningful long-term returns. Whether it’s advancing your current job skills, earning a new certification, or exploring a new field, enhancing your knowledge base and skills can lead to increased earning potential and greater job satisfaction.
While the returns may not be immediate or easily quantifiable like other investments, investing in your personal and professional growth can open doors to new opportunities and provide long-lasting benefits. This is a valuable investment that you can make, regardless of market conditions.
What to Consider Before Investing
Before you venture into investing, it’s crucial to have an emergency fund, ideally three to six months’ worth of living expenses, set aside. Additionally, paying off high-interest debt, like credit card debt, should be a priority. The average credit card account interest rates often outpace the returns you’d earn from investments.
Consider the tax implications of your investments. Some investments, like taxable brokerage accounts, are subject to capital gains tax, while others, like Roth IRAs, offer tax-free income in retirement.
Finally, diversification is a key strategy to manage risk. By spreading your money across different types of investments (stocks, bonds, real estate), you can better weather market fluctuations.
Conclusion
Wisely investing 20k requires careful consideration of your financial goals, comfort level with risk, and investment timeline. Whether you choose high-yield savings accounts, the stock market, real estate, or another option, the goal is to grow your wealth over time and move closer to achieving financial freedom.
Regardless of your chosen path, remember that investing involves risks, including potential loss of principal. So, it’s crucial to review any investment strategy periodically to ensure it still aligns with your financial objectives. Consider seeking advice from a financial planner or other professionals to help guide your investment journey.