Most of us have probably taken some sort of introductory financial class in school, some of us paid attention, and some of us were uninterested, staring at the wall, waiting for class to be over. But the truth is, financial literacy is a critical skill set that can empower individuals to make informed decisions about their money. Investing can be overwhelming, especially for new investors. There are countless options and strategies for a new investor to choose from, and sometimes they can be confusing, but quite frankly, they don’t have to be. Understanding the basics of investing will allow you to build wealth and achieve your financial goals.  

Why should I invest?

Before looking into how you should invest, it is important to look at why you should be investing. The most important thing to do as a new investor is to figure out your goals and what you want to accomplish. Are you looking to purchase a home in the future? Do you want your savings to keep pace with inflation? Are you saving for retirement? Do you want your money to work for you? While some people have similar situations it is best to determine what you want to get out of investing. 

Understanding the Types of Investment Accounts

While there is an array of different investment accounts the basics boil down to retirement or non-retirement accounts. These are known as “qualified” or “non-qualified” accounts. 

“Qualified” accounts are a type of account that generally receive tax advantages and are used to help people build wealth for retirement. Some of the most common types of “qualified” accounts are: 

• Traditional IRA (Individual Retirement Account) 
• Roth IRA 
• Traditional 401(k) 
• Roth 401(k) 
• 403(b) 

These types of accounts come with a set of rules delegating how much money you can put into them each year, and when you can begin withdrawing money from them. It’s important to consult with a financial professional for how much you can contribute because often the IRS will change these rules, leading you to miss out on opportunity, or simply contribute too much and receive a penalty. Some retirement accounts, such as 401(k)s and 403(b)s are employer sponsored plans. This means that they are typically offered through your employer. Often when starting a new job an employer will offer you to enroll in their 401(k) or 403(b) plan. If you choose to enroll in this plan a certain amount of funds that you elect will be taken from each paycheck and will be contributed to your account. The funds would then automatically be invested into certain investments that you had previously chosen, allowing the money to grow and compound on itself while you are working. Many times, an employer will offer to match your contributions up to a certain percentage, as detailed in the plan documents. 

 If your employer does not offer a 401(k) plan, there are still options for you to open a retirement account. These are IRA accounts or Individual Retirement Accounts. IRA accounts are self-directed retirement accounts that any individual can contribute to as long as they have earned income in the tax year that they are contributing. 

Traditional contributions are what is known as “pre-tax” money. This means that these are monies that you have not yet paid taxes on but will in the future. When you withdraw from a traditional retirement account, all of the money is subject to taxation at your income tax bracket. On the other side of the aisle are Roth contributions. Qualified withdrawals of earnings from the account are tax free. Traditional contributions will reduce your taxable income for the year, while Roth contributions will not, so it’s best to consult with a professional to determine which option will best suit your needs. 

“Non-qualified” accounts are types of investment accounts that do not receive any special tax treatments from the IRS. Some examples of “non-qualified” accounts are 

• Individual Brokerage Accounts 
• Joint Tenants with Rights of Survivorship 
• Tenants in Common 
• Trust accounts 

 These are known as capital gains treated accounts. In a “non-qualified” account, you will only pay taxes if you sell an investment at a gain. For example, you purchase a stock at $100, and it grows to $150 and you never sell it, then there will be no taxes on that gain. However, if you sell that stock at $150 you will have a $50 gain on that position and you will owe taxes on it. If you own the position for longer than one year you will pay taxes at your long-term capital gains tax rate, but if you have owned the position for less than one year, you will pay taxes at your ordinary income tax rate.  Selling a position at a loss can also help to offset capital gains in that tax year.  Since this is not a designated retirement account you can withdraw funds as you need them. There are also no rules to how much you can contribute to a “non-qualified” account in a given year. 

When should I begin investing?

We have all heard the phrase “it’s never too late to start”, but does that really hold true? The short answer is no, it’s never too late to start, but there is a great benefit to begin investing as early as you can. Investing early is one of the best ways to build wealth over time. This is because you have time on your side, you can take full advantage of the power of compounding returns, allowing your money the opportunity to grow. The earlier you start, the more potential you have for growth, while teaching yourself important savings habits along the way. 

So how do I Start?

The first step to investing should always be to determine what you are trying to accomplish, as it will serve as the backbone to your financial plan. This will help you determine the best tool to get you to that goal. It may be beneficial to reach out to a licensed professional, as they have the knowledge and tools to get you started on your journey. If you have any questions, please feel free to reach out to us! 

*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Investing involves risk including loss of principal. No strategy assures success or protects against loss. 

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.