Investing Breakdown: How to Get Started & Which Account is Right For You

So you want to start building serious wealth — that means you’re ready to invest! When it comes to building generational wealth, it’s truly about more than just the cash you have, it’s about making investments that can help grow your wealth. We need more Latinas building generational wealth in our community and that begins with financial literacy. Where should you start? What is a good investment? What’s the difference between all these accounts and why do they have so many numbers in their names? A  CNBC/Momentive Invest in You survey found that 49 percent of Latinxs don’t currently own individual stocks, mutual funds, bonds, exchange-traded funds, cryptocurrency or real estate. This needs to change and here are some tools to help you get started:

Where to Start Investing:

Investing is what builds wealth, and that’s because investing is your money working for you. Compound interest is the secret sauce here. You invest money in the stock market, and it earns interest. Then you put some more money in and now you are earning money ON TOP of both the money you’ve already contributed plus the interest you’ve already earned!

If you earn 4 percent interest on a million dollars invested, that’s $40,000 a year. In just INTEREST.

Ok, but how do we get to that $1 million? We start by thinking about old you. That’s right, I’m talking retirement accounts. If we’re lucky, we’ll get old. And old us is still going to love going out to eat and having a roof over their head. That means starting to build wealth in the accounts that our future selves will use. And the sooner we get started, the better chance we have at becoming rich, even if you’re the first one in your family to be able to invest. Hopefully you have access to a retirement plan at your job but if not, don’t worry- you can still invest.

Common Workplace Accounts:

The 401k: This is the OG of workplace retirement accounts. Here are the fast facts:
— You can put up to $20,500 a year from your salary into your 401k
— Your company may offer a match, meaning they put money in on your behalf up to a certain amount
— You can’t take the money out before 59 ½ without paying income taxes AND an early withdrawal penalty
— You can take a loan against your 401k but you need to pay it back
— Most 401k contributions are considered PRE TAX. Which means the money you put in is not taxed in the year you make a contribution. Your contributions are taxed as income when you start taking money out in retirement.
— The money comes directly out of your paycheck and never hits your bank account.

The 403b: This is the public version of the 401k. Meaning if you work in a public sector job, like teacher, firefighter, or even a priest, you will have a 403b and not a 401k, but they basically work the same way.
With most 403b’s you can opt to have your contributions be pre OR post tax. (They will probably default to pre tax if you don’t choose.) All of the other things are the same!

Non-Workplace Retirement Accounts:

The IRA: This one is for all of the folks who don’t have a workplace retirement plan. IRA stands for Individual Retirement Account, and instead of being linked to your job it’s linked to you as an individual. FYI: If you’re a non-citizen you can open an IRA too.

There are two main IRAs: Roth IRA & Traditional IRA:

Here’s what they have in common:
— Both are non workplace retirement plans
— Both have a $6,000 personal contribution limit each year (or $7,000 if you’re over 50)
— You can have one of each account

Roth IRA:
The Roth IRA is generally best for middle and lower income folks. This account has what we call POST TAX CONTRIBUTIONS, which is a fancy way of saying you pay taxes the year you make the contributions. When you retire and start pulling money out of the account you don’t have to pay taxes again.
There is an income limit for a Roth IRA though. So if you earn more than $144,000 after deductions and credits as a single filer for 2022, or $204,000 as a married joint filer, then you can’t contribute to a Roth.

Traditional IRA:
The Traditional IRA is better for higher income earners. There’s no income limit so if you have a hefty salary you can contribute to a Traditional IRA. Contributions to this account are PRE TAX, so once again you’re not taxed when you put the money in, but are taxed when you take the money out.

IMPORTANT NOTE: I said there’s a $6,000 contribution limit each year and that you can have both accounts. That means you can put $6,000 in total across the two accounts. So you can put $3,000 in the Roth and $3,000 in the Traditional because that’s a total of $6,000.

How Taxes Factor Into All This:
The great thing about retirement accounts is they come with tax perks. The government is trying to help you out a little! You can deduct any PRE TAX contributions you make to a retirement account. So if you put $6,000 into your Traditional IRA this year, you can deduct some of that money from your taxes. With the POST TAX contributions, you pay your taxes one time and then the money grows tax free for the rest of time.

When it comes to taking your money out…

What they ALL have in common, the 401k, the 403b and both IRAs is that they are all retirement accounts. The government incentivizes people to save and invest for their own retirement because the government does not want to pay for old you. So the government wants you to invest in these accounts, and that’s why they give you those tax breaks we talked about earlier.

The government also really doesn’t want you to take the money out before you get old. So if you take money out of these accounts before 59 ½ years old, you’ll be penalized by the government. That means they’ll hit you with an early withdrawal fee. It sucks, but it makes sense when you remember that they’re trying to get you to take care of 76 year old you. Starting your investing journey with your retirement accounts is putting yourself in the best position to be balling out when you’re older. It gives your money the most time to grow in the markets as well.

If you can contribute $500 a month you’ll be a millionaire in 34 years.
If you can invest $1,250 a month you’ll be a millionaire in about 24 years.