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What Accounts To Consider When Starting To Invest Ft. Kristin Burton

Hi everyone! Today we have a very special guest on CG! Kristin Burton – she is a practicing pulmonary/critical care PA. She is also the founder of Strive Coaching, a company designed to promote financial literacy and financial independence to healthcare professionals. 

Blogs around money and finances have always been super popular, so I figured why not have a true expert come in and share their knowledge around one of the topics you all have highly requested – where to invest first. So without further ado, I’ll let Kristin take it from here (and yes, this is all applicable whether you are a healthcare professional or not):

Investing is one of the most important life skills anyone can learn, but it’s something very few of us are taught anything about. In order to ensure that you can retire at 65 (or ideally even earlier), you need to be investing consistently. Starting as early as possible will make your life tremendously easier, as compound earnings will do more of the heavy lifting for you. If you haven’t started investing yet, today is the day to start.

When deciding what accounts to use, the least sexy accounts are typically the correct choice. Your employer 401(k) is the first place to go, particularly if any sort of employer match is offered. An employer match is a 100% free return on your investment, and absolutely shouldn’t be missed. For example, if you have an $50,000 salary and a 3% match, the match alone will generate over $150,000 for you over 30 years of investing. 

Your 401(k) contributions will reduce your taxable income in the year you make them, which can create substantial tax savings and allow you to invest more now. You will ultimately pay income taxes when you withdraw the money in retirement. Over 80% of 401(k) plans now offer Roth contributions as an option. By electing to make a Roth contribution, you are changing the tax status of your investment. You will be contributing post tax dollars, meaning no current savings on income taxes, but the withdrawals will be tax free in retirement. For most young investors in a relatively low tax bracket, Roth is an ideal option. In 2022, the maximum you can contribute as an employee to a 401(k) plan is $20,500.

Although 401(k) plans allow access to employer matches and profit-sharing plans, there are downsides. Namely, 401(k) investment options are limited and may not be what you desire. In addition, the funds offered may have high expense ratios, or fees, associated. Not only do the funds you select within your 401(k) plan have fees, but the plan itself has administrative fees. These fees are difficult to determine but can be accessed by requesting the information from your plan servicer. 

The next stop for most early investors already getting their full 401(k) employer match should be a Roth IRA. A Roth IRA allows you to contribute money after you pay taxes, and then access it tax free in retirement. These accounts are opened outside of your employer, which allows you to choose a company you desire to invest with. This creates incredible flexibility in the account fees (or lack of!) and increases the options of funds you can choose within it. For access to a huge amount of low-cost index funds or exchange traded funds, consider opening yours at Fidelity or Vanguard. I would avoid your local bank, as investment options will likely be more limited. Roth IRAs do have income limits to make direct contributions, but a Backdoor Roth IRA approach may be an option depending on your circumstances. Although the contribution limits are lower, $6000 for 2022, this account is still an outstanding place to build wealth. If you contributed $6,000 per year to your Roth IRA for 35 years, you could generate a balance of over $1 million!

If you have a high deductible medical plan, another incredible money hack is to utilize your health savings account to invest. A health savings account is actually the most tax favored way to invest – period. It allows you to make tax deductible contributions like a 401(k), the growth is tax free, and then withdrawals are tax free if used for qualifying medical expenses. Given the current costs of medical care in retirement are projected to be several hundred thousand dollars, this strategy can really bolster your retirement investing plan with tremendous tax benefits. Don’t invest the money within your health savings account if you don’t have an emergency fund in place and the ability to cashflow small medical expenses as they come up.

Once you’ve optimized your tax favored account options, investing in a taxable brokerage account is the next step. A taxable brokerage can be opened with any brokerage company but using the same company (hopefully Vanguard or Fidelity) that you used to open your Roth IRA can make life easier. This account is by far the most flexible. There are no restrictions on when you can access the money, meaning that you can pull from this account at any time regardless of age. You invest money that you have already paid taxes on. If you hold your investment for more than one year, you are taxed at long term capital gains rates when you sell. Unless you have an exceedingly high or low income, this is likely 15%. If you sell investments you have held for less than one year, you’ll be faced with short term capital gains taxes. These are effectively the same as your ordinary income tax bracket, which is a higher rate. Thus, invest for the long term! There are no limits on how much money you can invest in a single year. This account can be the perfect way to fund an early retirement. 

You may also consider investing in cryptocurrency as part of your wealth building journey. Remember, this is still a generally speculative investment. If you want to purchase cryptocurrency as part of your investing plan, make sure that it remains less than 10% of your overall portfolio. The bulk of your investments should be in traditional stock/bond investments within tax favored accounts. Once you have this critical portion of your nest egg in place, feel free to have fun investing in cryptocurrency!

Learning to invest is the most lucrative hobby you could have. As pensions have largely gone away, investing is a requirement to retire with dignity. Beyond that, investing can provide you a path to abundance, early retirement, flexibility, generational wealth, and more. For a deeper dive into how to create your own money plan and take your investing to the next level, enroll Money Boot Camp for White Coats. You can take $10 off enrollment with the code CLAIREGUENTZ.

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