Where to Save First
I created this list to help you decide what order to start investing your money. Before investing, I recommend having an emergency savings fund so you can access cash quickly if needed.
1. 401(k) Match
Contribute enough money to receive your full match. For example, if you make $100K and have a 4% match make sure to contribute $4,000 to earn your $4,000 match.
Many companies offer an Employee Stock Purchase Plan where employees can purchase stock at a discounted price. Plans vary by company but often you can buy stock at a 5%-15% discount. Most companies have a specific time you must hold the stock before selling.
A Health Savings account lets you set aside money on a pretax basis for qualified medical expenses. The best part is you can contribute with pretax dollars to the account and can withdrawal from the account tax free when paying for qualified medical expenses. To be eligible, you must be enrolled in a high deductible health plan (HDHP).
4. Roth IRA
Contributions are made with money you have already paid taxes on. Once you are age 59 ½ and have had the account for five years you can withdrawal your money tax free.
5. Traditional IRA
If you do not have a 401(k) through work this is a great place to start. Contributions are pre-tax and reduce taxable income. Your money grows tax deferred and you are taxed when you make distributions.
6. Additional 401(k)
Make additional contributions to your 401(k) beyond the company match. Contributions reduce your taxable income for that year. The max contribution in 2020 is $19,500.
This is your standard brokerage account. These accounts are great for investing money that you may need access to short term. There are no penalty/ limits for withdrawing or contributing money. There are no tax sheltering benefits but do allow tax harvesting strategies and long-term capital gains rate.
Many accounts have eligibility requirements and withdrawal rules. For example, 401(k) and Roth IRA allow a withdrawal for a first-time home purchase without a penalty (Up to $10,000). Health savings account has a 20% penalty for non-medical expense withdrawal. There are more rules to these accounts listed above and if you have any questions please don’t hesitate to email me at email@example.com.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Stocks investing involves risk including loss of principal. Rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs, and when rebalancing a nonretirement account, taxable events may be created that may affect your tax liability.