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How To Invest In A 401k For Dummies

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Limits For High Earners

401K for Dummies – A Beginners Guide to 401K Plans

For most people, the contribution limits on 401s are high enough to allow for adequate levels of income deferral. In 2021, highly paid employees can only use the first $290,000 of income when computing the maximum possible contributions.

Employers also can provide non-qualified plans such as deferred compensation or executive bonus plans for these employees.

Invest In Safe Bets And Blue

Certain asset types are more secure than others according to their historical performance. Index funds that track a diverse basket of securities tend to perform well over time and net reliably positive returns in the long run.

For example, the S& P 500 fund is a benchmark index tracking Americas 500 largest publicly traded companies. Any investor can buy a share of the S& P 500 fund, each of which represents a small ownership stake in each of the companies held within the fundthese include mega-cap firms such as Amazon, Walmart, and Apple.

The average inflation-adjusted performance of the S& P 500 is about 7% per annum. That means we can assume an initial investment of $10,000 will practically double after 10 years in the market. However, as demonstrated below , the S& P 500 suffers from high volatility, with some years experiencing drastic lows followed by sharp highs.

Fig.1. Source: Investopedia

Retirement investors often cannot afford to allocate all their capital to risky investments. Although index investing is a viable strategy for many, more risk-conscious investors should consider safer assets that experience less volatility year over year, such as:

Choose An Investing Account

Generally speaking, to invest in stocks, you need an investment account. For the hands-on types, this usually means a brokerage account. For those who would like a little help, opening an account through a robo-advisor is a sensible option. We break down both processes below.

An important point: Both brokers and robo-advisors allow you to open an account with very little money.

The DIY option: Opening a brokerage account

An online brokerage account likely offers your quickest and least expensive path to buying stocks, funds and a variety of other investments. With a broker, you can open an individual retirement account, also known as an IRA, or you can open a taxable brokerage account if youre already saving adequately for retirement in an employer 401 or other plan.

» View our top picks for IRA accounts

We have a guide to opening a brokerage account if you need a deep dive. You’ll want to evaluate brokers based on factors like costs , investment selection and investor research and tools.

The passive option: Opening a robo-advisor account

A robo-advisor offers the benefits of stock investing, but doesn’t require its owner to do the legwork required to pick individual investments. Robo-advisor services provide complete investment management: These companies will ask you about your investing goals during the onboarding process and then build you a portfolio designed to achieve those aims.

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Beware Of Taxes On Distributions

Distributions from a 401 plan are generally subject to ordinary income taxes and may be subject to an additional 10% early withdrawal tax if the distribution is made prior to age 59½. Unless a distribution is rolled over, the taxable portion of the distribution is subject to mandatory 20% federal withholding.

Understand What A 401 Is

Updated Learning: How To Invest In A 401k For Dummies

While you sign up for your 401 through the company you work for, it is typically managed by a separate financial firm, such as Vanguard, Fidelity, Principal, Schwab, etc. This is the company you will receive important information and disclosures from about your account and investments.

If you leave your employer, in most cases your account will remain at the financial firm that originally managed it, unless you roll it over to a new company .

You can begin withdrawing money penalty-free at 59 ½ in most cases. If you withdraw money before that age, you will be hit with a 10% early withdrawal penalty and pay income taxes on the distributions. You can also take a 401 loan, which needs to be repaid, including interest. Learn more about that here.

Not every employer offers employees a 401. If that’s the case, you can open an IRA, which also offers tax advantages for those investing for retirement, on your own through a brokerage firm.

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Limit Single Stock Positions To 5% Of Your Portfolio

But, you need to limit your downside risk too. Make sure a stock is never larger than 5% of your total portfolio size. If your portfolio is $10,000, no single stock position is greater than $500. If the share price goes to $0, you only lose $500.

Because of this rule, you might wait to buy single stocks once your portfolio is at least $10,000 in size. Invest your first $10,000 in index funds and sector ETFs. At this point, you can diversify into stocks with new money.

Reap The Benefits Of Compound Interest

If youre itching to get started investing, great! If youre waiting until you have enough time or money, or for the stock market to cool down or heat up, stop that. Investing any amount of money is never a futile exercise, thanks to the magic of compound interest.

What is compound interest? It’s like a runaway snowball of money growing larger and larger as it rolls along. All you need to get it going is starter money.

As interest starts to accumulate on your initial investment, it is added to your ball of cash. You continue to earn interest, your balance expands in value and picks up speed and on and on it goes.

The sooner you get the snowball rolling, the better. Now lets go over how to make your pennies multiply.

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Retirement For Dummies: 5 Things You Should Do Before Retiring

This retirement for dummies guide will come in very handy during the last 10 years of your career, which is critical in shaping your life after retirement. Your future is in your hands and thats why you need to focus on crafting the best retirement plan and implementing your strategies.

Its easier said than done since a lot of major life events happen when youre at the last stretch of your career. Focus in saving for retirement and protecting what you have to enjoy retirement. With retirement just around the corner, here are important steps you need to do to have a more comfortable retirement.

Investing For Dummies: No Youre Not A Dummy Youre A Beginner

401k FOR DUMMIES: How to pick and move your Roth IRA (Fidelity, Vanguard, and Acorns)

This post may contain affiliate links or links from our sponsors. Read our disclosure policy here.

Heres the truth: the world of investing was made confusing and to make you feel like a dummy on purpose. The more confusing it is, the less we care to learn ourselves. The less we learn and know, the less we have and the more money they make.

Doesnt sound like a great plan for us, right?

And, unless youre in the business or a financial advisor, I would say that most people today are still at the stage of investing for dummies.

Contents For This Post

  • Summary
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    Following Up On Your Investments

    Once you’re invested, you’re not done. There is definitely some follow-up that needs to happen on your part. Not a lot, but some.

    Once youve placed your first trade, youre not done. A lot of people think that investing is set and forget and it really isnt. While investing in mutual funds and ETF is much less hands-on, you should evaluate your portfolio at least once a year, if not once a quarter.

    So, after youve invested, here is a detailed list of what you need to do after you place a trade.

    Then, you should think about setting up automatic investing. This is a great way to build your portfolio over time.

    Finally, you have to handle some tax paperwork every year. If you’re invested in an IRA, you simply save the paperwork and nothing is required. However, if you’re investing in a taxable brokerage account, you need to potentially report your earnings on your tax return every year.

    Don’t be scared by taxes, it’s not complicated for most situations. Here’s our list of the best tax software for investors, but you can also consult with a CPA or tax professional if you don’t know what to do.

    Investing For Dummies: How To Start Investing If You Are Uncertain

    There are thousands of financial products and services out there, and we believe in helping you understand which is best for you, how it works, and will it actually help you achieve your financial goals. We’re proud of our content and guidance, and the information we provide is objective, independent, and free.

    But we do have to make money to pay our team and keep this website running! Our partners compensate us. has an advertising relationship with some or all of the offers included on this page, which may impact how, where, and in what order products and services may appear. The College Investor does not include all companies or offers available in the marketplace. And our partners can never pay us to guarantee favorable reviews .

    For more information and a complete list of our advertising partners, please check out our full Advertising Disclosure. strives to keep its information accurate and up to date. The information in our reviews could be different from what you find when visiting a financial institution, service provider or a specific product’s website. All products and services are presented without warranty.

    I love the book series “For Dummies” because they take a light hearted approach to making complex subjects easy. That’s why I wanted to create this Investing For Dummies guide because investing is complex – and I want to make it easy for you to start.

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    Explore The Roth Option

    Some companies offer a Roth 401 plan, which differs from a traditional 401 because it is funded with after-tax dollars. The earnings on Roth contributions will be tax free if the distribution is made 5 years or more after the January 1 of the first year a Roth contribution is made and the distribution is made on account of death, disability or attainment of age 59½.

    Am I Getting Good Advice From My Financial Advisor

    What Is A 401k Plan For Dummies

    Good question! When you feel like you need a retirement investments for dummies guide, you probably arent confident in your ability to assess whether investment advice is useful or not.

    And, frankly, you are not alone.

    In a 2016 poll by the American Association of Individual Investors , only 2% of respondents claim to trust financial professionals a lot. While, 65% of respondents said they mistrust the financial services industry to some degree 15% say they trust them a little.

    Here are a few things you can do to feel better about what your financial advisor tells you to do:

    Ask Questions : Ask questions about their recommendations! And, more importantly, make sure you understand the answers. Does your advisor explain things in a way that leaves you feeling confused? If the answer is yes, then you might not have the right advisor. The role of an advisor is to help you feel confident about your money.

    Understand Compensation: Make sure that you understand exactly how your advisor is compensated. Ideally you use a fee only advisor. You are paying them for their time and expertise. A fee only advisor is working for you and only you. However, some advisors earn commissions on the products they sell you. Commissions are okay, but not if the advisor is selling you something you dont need.

    Try Out the Advice: Dont blindly trust that your advisor knows what they are doing. Vet their advice.

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    Things Beginners Absolutely Must Know About Saving For Retirement

    David Weliver|

    Modified date: May. 14, 2021

    If youre reading this, good for you. It means that youre at least willing to admit that you should get around to doing something about saving for retirement.

    Ugh. I know.

    Theres nothing fun about this. Saving hurts, for one. And retirement is, like, so far away that its easy to ignore.

    Both true.

    But heres the thing: Retirement is your eventual freedom from wage slavery the necessity of working for food and shelter. Money you save for retirement is money that buys freedom to do whatever you want.

    And even better: The sooner you start saving, the less you have to save to be able to stop working. Even $50 a month will make a difference.

    Here are some other things to know about starting to save for retirement.

    Whats Ahead:

    What The Heck Is A Stock

    Im sure many of us wish we would have purchased stocks of Amazon in the late 1990s because of what Amazon is worth today.

    But how does owning that stock actually earn someone money? In other words, how the heck does owning a stock actually work?

    To start, a company like Amazon is going to raise money so they can grow their company. Some of the most common methods is taking a loan from the bank, issuing a bond , or by offering shares of stock.

    As a shareholder in the company, you are investing your money into a company as capital without a guaranteed return. This is the risky part.

    However as a shareholder, there is also no limit on how much you can earn. This is the reward part.

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    What Is A 401 Plan

    A 401 plan is a retirement savings account that allows an employee to divert a portion of their salary into long-term investments. The employer may match the employee’s contribution up to a limit.

    A 401 is technically a “qualified” retirement plan, meaning it is eligible for special tax benefits under IRS guidelines. Qualified plans come in two versions. They may be either defined contribution or defined benefit, such as a pension plan. The 401 plan is a defined contribution plan.

    That means that the available balance in the account is determined by the contributions made to the plan and the performance of the investments. The employee must make contributions to it. The employer may choose to match some portion of that contribution or not. The investment earnings in a traditional 401 plan are not taxed until the employee withdraws that money, typically after retirement. After retirement, the account balance is entirely in the hands of the employee.

    More than 100 million Americans are covered by defined-contribution plans, like a 401 or similar, nearly half of U.S. workers in the private sector. And nearly half of those plans are immediately vested participants in employer matching contributions, according to a 2019 report by Vanguard.

    Should I Buy An Annuity Or Is It A Scam

    401k for Dummies – 401k Explained for Dummies

    Annuities can be a great way for those in or near retirement to stabilize a portion of their income. Some feel this is another leg on the retirement income stool along with Social Security, pensions and your various investment accounts. A lifetime annuity guarantees your income for life no matter how long that turns out to be.

    Annuities can be a solid way to insure income, but too often annuities are sold rather bought. Annuity contracts can be complex to read and understand, it is difficult for many investors to fully grasp the restrictions, underlying expenses and the surrender fees.

    • If you are considering any annuity you really need to shop around. Beyond what is offered by those actively trying to sell you an annuity, look at low cost, no-load options like those offered by Vanguard and others.
    • It is appropriate to ask how much you would receive in monthly income from several carriers and compare the answers. You will find that the payments may differ widely for the same annuitization option.
    • Another key question is how much of your nest egg do you want to commit to an annuity?

    Explore more of the pros and cons of annuities or get an instant annuity estimate. Find out how much income you could buy and see various options.

    You might also want to explore other ways to produce retirement income.

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    Should You Invest In A Super Fund

    You can invest in all sorts of assets outside of super, either directly or through managed funds. Most super funds will also offer a wide range of choices for investing your money, including their own blended investment options, such as growth, conservative or balanced. So should you be investing your retirement savings in super or look elsewhere?

    A key benefit of investing through your super fund is the potential savings on the tax on your investment income. Any investment earnings in your super fund are taxed at a maximum rate of 15%, regardless of the marginal tax rate on the rest of your income. The main drawback of investing in super is the money you invest and the investment earnings are locked away until you reach your preservation age and/or meet a condition of release. If you need access to the money youre investing in the short or medium term, then your super fund isnt the right place for it.

    When Is The Money Yours

    Some types of matching employer contributions are subject to a vesting schedule. The money is there in your account, but you’ll only get to keep a portion of what the company put in for you if you leave your job before you’re 100% vested. You always get to keep any of the money that you personally put into the plan.

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