Well I'll give you a list of actionable items at the end of this post, but there's some exposition needed first. This is all pretty general advice and it may, or may not, suit your particular situation.
So you'll want to open a standard brokerage account (I recommend with Vanguard). You need to meet their minimum requirements, electronically connect your bank account, and send the brokerage cash that they will put into a prime money market fund, aka a settlement fund for you. This is the account you will do your non-retirement investment in, (fully taxed).
Generally speaking, in a taxable account, you want your investments to last for at least a year, so you get the long-term gains tax benefit (as opposed to paying higher short-term tax rates, i.e. those investments held for under one year).
You also will want to separately have a Roth IRA account at the same brokerage. This is where you invest your money for retirement. All money put into a Roth IRA is “after tax” income, meaning the money you contribute you already paid normal income taxes on when u earned it.
Roth IRAs are the best b/c once the money is in the Roth, it will NEVER be taxed again, which means all the money it earns and generates and appreciates in value will be 100% tax free to the investor! This is the greatest deal in finance!
There are also Traditional IRAs, but I don’t recommend using those, b/c while they avoid (defer) upfront taxes, they will ultimately get taxed for more when you go to take the money out years later. If you have money in a Traditional IRA, roll it over to a Roth, but make sure it won't bump your tax bracket, b/c this conversion will be taxed. If it does bump your bracket, do as much as you can per year without bumping your bracket over as many years as necessary.
You may also be eligible for a 401k from your employer. I recommend using a 401k ONLY if the employer offers a “match” which if they do, is free ‘extra’ money to you. So say an employer offers a max match of 3% if you contribute 6%... then i recommend you do the 6%, but no more, in order to get the max 3% match out of the employer.
Then, once the money is vested, convert or “roll it over” into your Roth. You will owe taxes at the moment u move money from a traditional IRA or 401k into a Roth; but it’s worth it, bc from then on it earns tax free. It is better to pay tax now, today, then pay it later when the tax bill on your investments will be exponentially bigger b/c the money earned via that meantime will be bigger. (The exception being if you're very close to retirement, then check with a tax professional, but make sure they really know their stuff!)
Know your employer's vesting rules. If you have a big amount to rollover, and doing so would bump your tax bracket, then consider rolling over as much of it as you can across a multiple number of years without bumping up your bracket. (I'm repeating myself a bit, huh? But its good to get it to sink in, and know the same principle applies to these differing financial scenarios)
List of Actionable Items:
Generally speaking, in a taxable account, you want your investments to last for at least a year, so you get the long-term gains tax benefit (as opposed to paying higher short-term tax rates, i.e. those investments held for under one year).
You also will want to separately have a Roth IRA account at the same brokerage. This is where you invest your money for retirement. All money put into a Roth IRA is “after tax” income, meaning the money you contribute you already paid normal income taxes on when u earned it.
Roth IRAs are the best b/c once the money is in the Roth, it will NEVER be taxed again, which means all the money it earns and generates and appreciates in value will be 100% tax free to the investor! This is the greatest deal in finance!
There are also Traditional IRAs, but I don’t recommend using those, b/c while they avoid (defer) upfront taxes, they will ultimately get taxed for more when you go to take the money out years later. If you have money in a Traditional IRA, roll it over to a Roth, but make sure it won't bump your tax bracket, b/c this conversion will be taxed. If it does bump your bracket, do as much as you can per year without bumping your bracket over as many years as necessary.
You may also be eligible for a 401k from your employer. I recommend using a 401k ONLY if the employer offers a “match” which if they do, is free ‘extra’ money to you. So say an employer offers a max match of 3% if you contribute 6%... then i recommend you do the 6%, but no more, in order to get the max 3% match out of the employer.
Then, once the money is vested, convert or “roll it over” into your Roth. You will owe taxes at the moment u move money from a traditional IRA or 401k into a Roth; but it’s worth it, bc from then on it earns tax free. It is better to pay tax now, today, then pay it later when the tax bill on your investments will be exponentially bigger b/c the money earned via that meantime will be bigger. (The exception being if you're very close to retirement, then check with a tax professional, but make sure they really know their stuff!)
Know your employer's vesting rules. If you have a big amount to rollover, and doing so would bump your tax bracket, then consider rolling over as much of it as you can across a multiple number of years without bumping up your bracket. (I'm repeating myself a bit, huh? But its good to get it to sink in, and know the same principle applies to these differing financial scenarios)
1. Call Vanguard at 1-800-345-1344 (VG = Vanguard)
2. Ask them to open an account for you, & ask them to take your info over the phone, pre-fill out the forms for you, and create a login for you at their website.
3. Login to the VG website on your computer with the login info they give you, and have them walk you thru completing the forms to submit electronically, (no need to print anything out). Set your own password, don’t forget it.
4. Ask them to open both a regular taxable brokerage account for you, and a Roth IRA brokerage account for you. One login will access both.
5. You will need a minimum of $1,000 for each type, (taxable and Roth), to invest in a VG mutual fund. Ask them to walk you thru the procedure to add your bank account. Ask them to walk you thru transferring at least $1,000 from your bank account to each separate VG settlement fund.
6. Once the money shows in the VG settlement fund, you can invest in, or buy, VG mutual funds that only require a $1k minimum.
7. Decide when you want to invest. Generally speaking, trying to time the market is a fools errand, but you want to be aware of the news cycle, at least in the short term. Try to buy-in when the market is at a low, not a high.
8. When you’re ready, either ask them on the phone, or login by yourself, to buy $1000 worth of the “STAR” fund in the taxable brokerage account; and another $1000 worth of the target retirement year that applies to you in the Roth IRA. (If you’re ~25, and the year is 2020, you will probably retire ~2065, so you pick the “Target Retirement Year 2065” fund).
9. Don’t forget to go back in a few days and confirm the micro deposits on the VG website, that VG will make in your bank account.
10. Download the VG app to your phone and tablet.
11. If available, setup “voice verify” with VG about a week or so after opening your account.
12. If you have existing investments in another brokerage, or a 401k outside of VG, find out how much of it is “vested,” (the portion you directly own and control) and ask VG how to get that amount into a “rollover” account at VG. Just be careful to not bump your tax bracket if its rolling over from a non-Roth account to a VG Roth account.
13. If you are transferring existing investments to VG, ask VG if any of them can be transferred "in-kind" which if possible, might prevent a taxable event.
14. If possible, contribute $500 in after tax income to your Roth IRA every month. That will let you hit your max contribution for the year, $6k. If you can't do that much, do whatever you can, be it $250, $100, or $50; but whatever it is, do it every month. Try to automate it from your bank account.
15. Also consider downloading to your phone and tablet the Yahoo Finance app, its good for tracking investments and market headlines and corporate news.
----If all else fails, just remember the riddle of steel. Money is worthless unless it is put to work for you! Wield it, learn to trust your financial discipline!
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Millenials and Roth:
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