You should first invest in your company’s 401K plan, up to the annual limit. Currently, you can put $19,500 into your 401K plan each year, with an additional $6,500 “catch-up” allowed if you’re older than 50. This is a great deal for several reasons.
First, it’s easy. You can have the amount automatically deducted each month simply by choosing to do so on your employee portal, or with the help of your Human Resources director. You don’t need to even open an account at a financial institution.
Second, the tax benefits are outstanding. You get to deduct any amounts contributed. They get wiped off your taxable income, and that lowers your tax bill each year. If you have access to a “Roth” 401K, that’s even better. You pay tax up front, but then the money grows tax free, and you don’t pay taxes on the money when you eventually spend it in retirement. You can’t pull ANY of it out until you’re over 59.5 years old, otherwise you’ll get a tax penalty. But that’s a good thing, you don’t need to pull it out, and the tax penalties make sure you have an extra incentive to leave it in there!
If you don’t have a 401K available at work, you can establish an IRA account at a financial institution, and get similar tax benefits. The annual investment limits are lower, $6,000 with an extra $1,000 if you’re older than 50, but the tax benefits work in much the same way, and you have a Roth option. It’s a good approach to investing if it’s your only option, although the 401K is less hassle to set up.
The third benefit of the 401K is the employer match, if it’s offered. Usually your employer will match up to a certain percentage of your income, say 6%. This means if you make $100,000, and you contribute to your 401K, your employer will match the first $6,000 you put in. Think about that! That’s a 100% return on that $6,000, right away. That’s the best return you can possibly get in investing!
Generally speaking, your 401K should be invested just like a normal stock portfolio, which will be discussed later. Your 401K plan should have some easy investment options. If you’re not willing to read the section later in the book where we discuss stock investments, just choose the option for “Large Cap”, which may also be called “S&P 500” in some plans.
If you HATE stocks, I don’t care. You need to invest in your 401K. The benefits are too great. It’s a shame that so many Americans have access to such a great wealth building tool and never use it during their lifetimes. It’s so simple, and automatic. If you did nothing but invest the maximum amount in your 401K from age 30 until retirement at 65, you’d retire a millionaire. It’s that simple. Do it.