Oink oink, Piggies!
In order to buy stocks, you need an investment account that you put money into and buy stocks in. Pretty simple concept, right? But there are lots of different kinds of accounts. Everyone should have three main accounts to park their stocks. Let’s talk about them briefly:
1) You need an IRA (Individual Retirement Account).
If you earn money, you can open an IRA. The most common types are Roth IRAs and Traditional IRAs. Now, there are differences between the two, but the bottom line is this: you are allowed to put in a certain amount of money each year ($5500/year for most people under 55, $6500 for most people 55 and over), and they’ve got tax advantages. For Roth IRAs, you don’t pay taxes when you withdraw the money; for Traditional IRAs, your current-year taxable income decreases. Either way, you’re saving at least some money. Yay! When the money is in the account, you can buy and sell stocks as you please. There are lots of rules involving everything from who can contribute how much to when you can/have to take money out, so be sure to figure out how they work which types are best for you. Also remember that these are for retirement…so don’t plan on taking money out of these until you’re older. Check out this site for more info on the details of IRAs.
2) You need a Retirement Account from Your Employer (or a special one if you’re self-employed).
Most employers will have a 401(k) or something similar that they offer…and oftentimes, they’ll match part or all of the money you deposit into it…up to a certain amount. That’s free money. So don’t be stupid and instead, be sure to get that free money.
These accounts also have tax advantages. That means you pay less in taxes. So take advantage of these accounts!
Employer-related retirement accounts have rules about how much you can contribute (they typically come right out of your paycheck). For a 401(k) in 2018, for example, you can put in $18,500/year if you’re under 50 years old…and your employer can put in more. If you’re 50 or older, you can put in an extra $6000/year too as a “catch-up contribution.” Here’s some more info on that stuff.
But what about people who are self-employed? There are options for you, too! One such example is an SEP IRA, which is a special, tax-advantaged retirement account for self-employed people. Cool! Of course, just like 401(k)s and the like, accounts like SEP IRAs also have their own rules, too.
Regardless of the what you open, make sure you understand the accounts and their rules.
3) A Traditional, Taxable Investment Account for Extra Investing
The above two types of accounts have lots of rules, but with those rules come tax-advantages and some protections (i.e. they’re protected, even if you file bankruptcy…which hopefully you will never have to do).
But, there are limits to how much you can put in them. …And you should be saving and investing as much as possible. So, you should have a normal, traditional, taxable investment account where you park and invest money above and beyond the two aforementioned types of accounts. The money you put in has already been taxed, and you’ll have to pay taxes on any gains that you make when you sell stocks. But, it’s a place where you can invest extra money after you’ve maxed-out your IRA(s) and employer retirement account(s).
In the End, It’s Your Money…and Your Life.
Despite the various rules and different types of accounts, the bottom line is that it’s all your money. With this trio of account types along with responsible and smart investing, you can really let the power of compounding interest work for you!
Oink oink, Piggies!
-Mr. Piggy Bank