Since humanity invented money, we’ve been investing money. From the first prehistoric transaction of goods to the quantum complexity of the New York Stock Exchange, investing has been part of making the financial world turn.
But just because the concept has been around for a while, doesn’t mean we’re all familiar with the ins and outs of investing and investment advice or even some of the basics such as setting financial goals.
For example, what does investing or the term “investment” actually mean? An investment is an asset purchased with the hope or intention that it will increase in value or generate some sort of income in the future.
An investment could be a stock, bond, ETF, mutual fund, collectible, real estate and several other items. For Carson Wealth or other investment professionals, the majority of the asset classes relevant to them would be stocks, bonds, ETFs, mutual funds or private placements.
Investment Vehicles
To purchase an asset, you need to have an investment vehicle. Now you may ask what an investment vehicle is. For starters, it is not something you get keys to and drive down the road!
An investment vehicle is an investment account you open, deposit funds into and then use to purchase assets. These are often categorized into qualified (retirement account) versus non-qualified accounts (other kinds).
Investment Vehicle Options
Now let’s look into some of the options for investment vehicles and the benefits/limitations of each investment option. Please keep in mind, these are my general thoughts and not an exhaustive list of investment vehicles or of rules and regulations on each. Consider this a primer to consider how to get started making investment decisions about your own investment portfolio.
Individual Retirement Account (IRA)
A retirement savings account (or IRA) is an investment vehicle many of us are familiar with. There are options within the IRA types, and pros and cons to each depending on your goals and asset allocation.
Traditional IRA
- Benefits – Tax-Deferred (pay taxes on it when you pull money out) and contributions reduce taxable income in the year you make the contribution.
- Limitations – There are contribution limits on how much you can contribute on a yearly basis, you generally need to be employed to contribute and they are subject to a 10% penalty if you take a distribution prior to 59.5 years old. You also have Required Minimum Distributions (RMDs), which means you have to take out a certain amount annually starting at age 72.
Roth IRA
- Benefits – Pay taxes when you contribute and enjoy tax-free distributions, not subject to RMDs at the age of 72.
- Limitations – Subject to contribution limits based on your adjusted gross income.
Beneficiary IRA/Roth IRA
In this scenario, you are listed as a beneficiary for an IRA of a loved one who has died.
- Benefits – You can assume the account as your own if it was your spouse that passed away
- Limitations – You have to liquidate the account by the end of the 10th year following the death of the original account owner, per the Secure Act, through withdrawals or RMDs.
Check out Carson Wealth’s SECURE Act RMD Calculator
401(k) Plan, 403(b) and 457 Plans
These plans are the most common and are often called the work-sponsored plan.
- Benefits – Higher contribution limits than the IRAs listed above and quite often your employer will match a portion of your contribution
- Limitations – The employer match will generally have a vesting schedule, and the plan sponsor may have a limited choice of investments to choose from
Individual Account/Non-Qualified Account
- Benefits – No contribution limits and can make distributions at any time
- Limitations – Taxed when assets are sold within the account (even if not making a distribution) and subject to capital gains taxes based on how long the assets were held
Joint Account
Non-Qualified Account (can be held with anyone you choose; spouse is the most common).
- Benefits – No contribution limits and can make distributions at any time
- Limitations – Taxed when assets are sold within the account (even if not making a distribution) and subject to capital gains taxes based on how long the assets were held
Trust Account
Non-Qualified Account (Revocable or Irrevocable)
- Benefits – Used to decide how your estate is settled after your death; revocable trusts can be altered throughout the lifetime of the settlor
- Limitations – Need to have a Trust Agreement to open a Trust Account; consult with your advisor/estate planning attorney
Again, this is only a primer on how to get started pursuing your investing goals. There are countless versions and hybrids of these, and plenty of other investment vehicles. Whatever your wealth level or risk profile, there’s a strategy that can work best for you – the answers are never one-size-fits-all.
I hope you found the list valuable for how to get started investing, and if there are any questions or concerns, I encourage you to reach out to a member of our team to learn more or find what options might work best for your personal financial situation.
To learn more about investing and working with a financial advisor, check out our free guide “Investment Process: The Importance of Process in Your Investment Strategy.”
Download the Investment Process Guide!
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This is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
Investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney.
A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
