As a young professional, I talk to friends a lot about our different investment options, not only for retirement, but for short-term and long-term savings, too.
Many people think that they should invest a brokerage account through E*TRADE if they want to invest, but for most people, there are better options and a very clear hierarchy that should be followed to be sure you’re taking advantage of all the perks our many investment vehicles offer.
Everyone has a different mix of investment options, but it’s very easy to follow. If you don’t have a type of account mentioned, that’s OK. Just move on to the next option.
Most of have the opportunities to invest through 401(k)s and IRAs as well as non-tax-advantage accounts, but not everyone knows which ones are best for different situations.
The most common situation for young people is the choice of 401(k), IRA (Roth and Traditional), or a regular brokerage account.
If you need a refresher course, check out the explanation of each of the types of retirement accounts. The only account we’ll discuss not included is the standard brokerage account. This is the type of investing account that is promoted most, so think E*TRADE.
As opposed to all the other investing accounts, which are retirement accounts, a standard brokerage account is not targeted toward people looking to invest for retirement (but you can still invest in one with an eye toward retirement). There are no tax advantages to this account, but for those who want to save for other goals, this could be the right place to do it. All earnings are taxed, but you can always withdraw both contributions and earnings with no penalties.
Where Should 20 Somethings Be Putting Their Investments?
So how should young people invest?
First, start with any 401(k) contributions that would earn a match through your employer. This is just free money, so if you get a match on up to 5% of your salary, deposit 5% of your salary. They’ll match with 5%, so you’re getting 5% of your salary for free! This is definitely your first step.
Next, invest in your Roth IRA. This account has far more flexibility than a 401(k), and your contributions can be withdrawn at any time with no penalty. Contribute up to the maximum, which is $5,500 in 2013 as long as you’re under the income limit (and you will be if you’re just starting out).
Once your Roth IRA is fully funded, keep funding the 401(k) through your employer if you are eligible, up to the maximum $17,500 for 2013. You might as well take advantage of any tax deferred savings incentives while you can!
Finally, you have my permission to invest in a regular brokerage account. This should be the last option because there are no tax advantages of this type of account.
If you’ve got enough to invest that you make it to the brokerage account, you’re doing a great job. But can you beat my savings goal?