How to Invest in Excess of a 401 (K) or IRA
Many investment tips are related to your retirement: how much to contribute to 401 (k), how much you should spend at any age, the differences between traditional IRAs and Roths, etc. But there are many other ways to invest for shorter-term goals. (or simply because).
A few notes: Before considering these options, the smartest steps are to make sure that your emergency fund is set up and that you deposit as much as you can (or up to the limit) of your retirement account (the exception here might be your 529 , depending on your situation).
And short-term investments are inherently more risky than your long-term ones. But they can also be very profitable.
529s
Like 401 (k) s, 529 plans are named according to the section of the tax code that defines them. These are tax concession savings plans sponsored by states or government agencies. There are two types: prepaid tuition plans and college savings plans . For our purposes, we will focus on the latter.
College Savings Plans are investment accounts designed to pay for future tuition, pay, textbooks, accommodation and meals for the beneficiary. You can invest in a variety of products including ETFs, mutual funds, and trust funds (which automatically become more conservative as the beneficiary approaches student age).
The 529s have the advantage that income is not subject to federal income tax, or generally state income tax, as long as it is deducted from the expense of qualified higher education. As with retirement accounts, if you withdraw money for unqualified expenses, you receive a penalty. According to the IRS , “gift tax consequences may arise if your contributions, as well as any other gifts to a particular beneficiary, exceed $ 14,000 in a year.” However, there is no income limit for opening them and there is no limit on the number of accounts you can create.
The potential disadvantage is that you are not guaranteed to come out ahead – this is still an investment. Depending on the market, you may have less money in your account than you originally had when your child reaches college age. There are also fees to consider: college savings plans may charge admissions fees, annual service fees, and more.
You can compare 529 state plans here .
Broker accounts
A brokerage account is a taxable account (the money you earn from your investments may be subject to capital gains tax) that allows you to invest in a variety of products, including stocks, bonds, REITs, money markets, CDs, ETFs, and mutual funds. foundations as well as others. (You also open retirement accounts through a broker.) There are no contribution or income restrictions, you can open as many as you want, and you can usually withdraw money whenever you want, no commission, depending on the broker. (Although transferring money between brokers will likely cost you.)
There are full service brokers that charge a transaction fee and discounted brokers like Ally, Robinhood, and TD Ameritrade. You, as an investor, choose which products you want to invest in (unless your full-service broker manages your account) and your broker takes care of the trades for you. I think of it as active accounts – you choose your investments and in some cases make trades – whereas I think robots (below) are passive investments.
Things to keep in mind:
- Minimum account
- Transaction Fee
- Annual maintenance fee (percentage or fixed fee)
- Inaction fee
- Transfer fee
- Minimum balance commission
Robo Advisors
Robo consultants are essentially cheaper brokers who manage your portfolio using an algorithm. They are usually advertised to novice investors.
Robos will suggest a portfolio based on the investor profile you created, which will differentiate them from online brokers. According to NerdWallet , your portfolio is likely to be made up of low-cost ETFs and index funds, and you pay the company that manages your account (say Wealthfront or Betterment), commission, and any out-of-pocket expenses. Robo changes the balance for you.
Some users like them instead of an anemic interest rate savings account. The catch here is that your money is not immediately available to you like it is in a savings account, and of course there is a chance of loss (your savings account is FDIC insured).
Direct storage plans
Some companies allow you to buy shares directly from them rather than through a broker, so you don’t pay any commission. “Some companies require that you already own shares in the company or be hired by the company before you can participate in their direct share offering plans,” the SEC notes . They may also offer dividend reinvestment plans that allow investors to automatically reinvest their cash dividend into the company.
You can buy fractional stocks and set up a monthly buy (for example, instead of buying X shares, you buy $ 50 worth of stock per month) or make a one-time purchase. You can set them up through a transfer agent.
Companies that offer this include : 3M, Coca-Cola, Ford, IBM, McDonald’s, Walmart, and many more.
Investing in one share is more risky than investing in a mutual fund or ETF (and you should never invest all your money in one share), but for some blue chips it can pay off.
High Yield Savings Accounts & CDs
These two options are not investments, but for very short-term purposes they are safer options with the potential for small returns. Here you can compare interest rates on high yield savings accounts .
CDs are not very attractive, but they can help in the short term, and they are insured. You invest over time and may earn slightly more interest than a regular savings account (it can be helpful to think of CDs as a savings account that you don’t have access to for a certain amount of time). If you withdraw the money before the deadline, you will be punished.
Here’s what Bankrate has to offer :
One way to maximize the profitability of a CD is to arrange it up the ladder, which means that you invest proportionately for different periods. Then, when each shorter certificate expires, you reinvest the proceeds in the longest-lived CD. So, if you want to invest $ 10,000, you can invest $ 2,000 apiece in one-, two-, three-, four-, and five-year CDs. At the end of the first year – when the one-year certificate expires – you put that money into a new five-year CD. Next year, you reinvest the funds from the expired two-year certificate into another five-year CD.
Bitcoin and other cryptocurrencies
I have nothing to say about cryptocurrencies – some experts compare buying cryptocurrency as speculation and not as an investment. If you still don’t know what it is and why you should care about it, we have some good explanations:
If you sold Bitcoin or used it to buy anything in 2017, remember that it is taxable income (it is subject to Capital Gains Tax).
I will say this: cryptocurrency is definitely something you can make or lose real money on. And I believe that this is the whole point of investing.