Common types of accounts:
- Roth IRA - every one of us young people should have a Roth IRA (IRA = individual retirement account). If you are many years away from retirement like we are, it's the best account. Why? Because it doesn't charge you capital gains taxes like most everything else. How it works: You can contribute up to $6k yearly, which will grow and be withdrawn tax-free at retirement. Free money is good. Take the free money. There are some complicated but legal ways around the $6k limit that we will cover in a later post.
- Brokerage Account - a general investment account with few rules - you can buy and sell just about anything. There's no annual contribution limit. However, brokerage accounts pay the most tax, which eats into your profits.
- Traditional IRA - This is the most general type of retirement account. How it works: The money you add to the account (up to the $6k limit) can be deducted from your taxes, so you contribute to the account without paying any taxes. After you invest in something and the money grows, you pay tax at retirement age when you withdraw the money for that golden girl's trip to Naples, Florida.
- 401k - This is a retirement account that is only available through an employer, which will sometimes "match" your contributions (your annual contribution limit is $19k). Employer matching is free money in addition to your salary, contributing to your 401k before you pay federal income taxes. Take the free money.
There are also some combinations and sub-types of these accounts, such as a Roth 401k and SEP IRA. No need to worry about those unless they apply to you.
Investment Options: Common Types
- Cash (including CDs, certificates of deposit) - Believe it or not, cash is certainly a type of investment. You can get interest income just from holding it, so technically, you are making money, even if it's just pennies.
- Bonds - a bond is a way to buy a piece of debt from some company or government and get a fixed-income return. Average historical returns are like 4-5% a year.
- Stocks - A share of stock in something represents a piece of ownership in the company. Average historical returns are something like 9-10% yearly.
- Mutual Funds (including index funds, bond funds, and stock funds) - These are buckets of many different holdings, which decrease your risk of say, a single stock like Lululemon's yoga pants becoming extremely unpopular overnight and the share price dropping. Most mutual funds have a 30-90 day limit on buying or selling into it.
- ETFs (exchange-traded funds) - These are very similar to Mutual Funds but are subject to fewer restrictions - you can buy and sell these just like a stock. Poppy recommends QQQ, PG, and VOO. (also HSY as another one of your investment options)
- Other - Real Estate, REITs, Hedge funds, Private Equity, options, futures, forex, commodities. These are all advanced investment options and, in the case of hedge/private equity funds, not available for the average person to invest in.
The technical term for these investment options is "asset classes." You can read more on Investopedia here, which has an excellent introduction to investing.
That's all for now! I'll send out the tracking sheet next week.