Investing is not when you put money in a parking space in a bank. Rather, investing is when you put money aside for 10 years or more. The longer your time horizon until you need money, the more I want you invested in stock-type choices. I say "stock-type" -- not stocks -- because most of us do better in mutual funds where we own tons of stocks in one fund. The earlier you invest, the wealthier you become. The more you save, the earlier you get to retire or meet other financial goals such as buying a first or second home. The following is an investment guide that details many of the retirement choices out there today...
Retirement Accounts
Roth-IRA (Clark's personal favorite!)
Investors put in after-tax dollars that are never taxed again. When you retire, you take out all your money and whatever it has earned tax free. Those age 50 and above can make annual catch-up contributions of an additional $1,000 above and beyond the usual limit.
Annual contribution limit: $5,000
Traditional IRA
This works the opposite of a Roth-IRA. You get a current tax deduction in the year you put money in your IRA. However, every penny you have in your account is taxed when you spend it in retirement. Those age 50 and above can make annual catch-up contributions of an additional $1,000 above and beyond the usual limit.
Annual contribution limit: $5,000
Non-deductible IRA (NOT RECOMMENDED!)
These give you no current tax benefit and tax your earnings when you retire. No one should do these.
SEP (Simplified Employee Pension)
Available to people who own their own business, are an independent contractor or have side income from a 1099 form. It works like a traditional IRA with a current deduction but everything is taxed at retirement. SEPs are flexible, in that investors can put in $0 in a year or as much as $46,000 for 2008, depending on how profitable the business is. SEPs allow you to bulk up your retirement savings in a hurry.
401(k) or 403(b)
These work-provided retirement plans have the same tax deal as the traditional IRA. You get a deduction in the year you contribute, but everything is taxable in the year it is spent. These are great if there is an employer match, which is essentially free money. So be sure to contribute at least up to the employer match. If you have trouble with the discipline of putting money aside, these are great because the money is pulled out by your employer before you ever see your paycheck.
Learn more about Clark's favorite choices for these investments
Beyond Retirement
Index funds/mutual funds
Index funds are a type of mutual fund and are just about his favorite. Index funds buy hundreds or thousands of stocks, including small stocks, international stocks and bonds. Clark likes index funds because they are cheap, they allow diversification and, if they're in a taxable account, there is almost no tax each year. Index funds are fine for all investments outside retirement accounts. Just remember that there are two kinds of mutual funds: "load" and "no load." Load funds have commissions and are sold by insurance sales people, financial planners, banks and stock brokers. About 80 percent of people buy this kind. But when you buy no-load funds, all your money goes to work for you.
Stocks
I almost never buy individual stocks and recommend that most people don't. You need to spend at least 10 hours per week doing in-depth research on companies you might want to own before making a decision to buy their stock. Most people buy on a hunch or a "hot" tip. Unless you want to do big time research, buy mutual funds where a professional has done his or her homework on your behalf.
Learn more about Clark's favorite choices for these investments
Saving for College
529 plans
529 plans are the most popular way to save for your child's college. A 529 is a tax free investment plan. You put money in from very small amounts per month (as little as $15 per pay period or $25 per month) to as much as $55,000 all at once.
Learn more about 529 plans
Coverdell Account
Coverdell accounts allows you to save money for college or private school grades 1 through 12. The money is spent tax free like a 529 account as long as it's used for education.
Learn more about the Coverdell
Further Reading
Investing 101 - An introduction to the key options you have in making investment decisions. (registration may be required)
Investing 201 - An introduction to more investment concepts. (registration may be required)
latimes.com - more stories from the "Money Library."
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