You’ve made it to the home stretch! (or if this is your first time here, read our last 3 posts to get caught up!) This is the 4th and final segment of our investing series. To recap so far, we’ve covered some of the basics of investing, investing within your retirement account, and WHY you should be investing. Here, we’re going to touch on how to invest outside of a retirement plan.
Maybe you’re maxing out your yearly 401(k) contributions and you have excess cash flow that you don’t know what to do with (you’re crushing it!). Or maybe you haven’t maxed your 401k contributions but want to invest in other ways instead (you’re also crushing it!).
First Things First: Determine Your Why
Understanding your why and having a goal for your money will help in a few different ways:
- Guide you to make the right investment decision
- Stick with your investing goal in the long run
You really shouldn’t be making investment decisions on a whim. Knowing what your time frame is, your risk tolerance, and the purpose of the goal will help guide your decision in making the appropriate investment decision.
Believing in your WHY will make it much easier to allocate money towards that goal when you would/could use it elsewhere. It will serve as a constant reminder when you start to question yourself during your progress. And quite honestly, more often than not, the most satisfaction comes from seeing yourself reaching your goals than actually reaching that finish line. (who doesn’t love a little happy dancing?)
“Success is a journey, not a destination. It requires constant effort, vigilance and reevaluation” – Mark Twain
Reasons People Invest
- You have a long-term savings goal and know you need to outpace inflation
- Looking for additional retirement savings to avoid working forever
- Desire to retire early/reach financial freedom
By investing outside of your retirement account, you gain more flexibility and control. Taking money from your retirement account can be a bit restrictive and often subject to a penalty (if taken before age 59 ½). While they’re great investment vehicles and offer tax-deferred or tax-free growth, you’re trading away easy access to your money.
For those that want to retire early or have a long-term savings goal, investing outside of a retirement account is a great way to accomplish that.
5 Ways You Can Invest Outside of Your Retirement Account
- Brokerage Account
This is going to be a non-retirement account that you can invest in stocks, bonds, mutual funds, ETFs, etc. They aren’t as tax efficient as a retirement account. However, there are investments that are intended to be more tax efficient than others. These types of accounts are great if you have a long-term savings goal or some extra cash flow on a monthly basis and you want to put your money to work.
- Roth IRA
Okay, I know this is technically a retirement account, but I LOVE the Roth IRA, it’s one of my favorite tax planning and retirement planning tools, click HERE to find out why. You can always take your contributions out tax and penalty free. There are also a handful of penalty exclusions if you need to take distributions early. Plus, a good mix of tax-deferred and tax-free retirement assets never hurt anyone!
- Real Estate
Whether this be purchasing a home or getting into real estate investing. Putting money into real estate is another way to invest extra cash. It’s also a great way to help diversify your portfolio. My husband and I recently purchased a duplex and are currently house hacking. If you’re interested in talking more about real estate, feel free to reach out! I’m extremely passionate about this.
- 529 plans
Looking to save for your child’s college expenses? This is another great investment tool for tax-free growth and distributions, if the distributions are used for higher education. Worst case, if you don’t end up using the funds for higher education, simply pay tax on the growth portion of the distributions.
- Health Savings Account
If you’re enrolled in a high-deductible health plan, you may be eligible for a health savings account. HSAs offer tax free growth and distributions, only if they are used for qualified medical expenses. And once you reach age 65, you can take distributions penalty free without having to use them for medical expenses. You just need to pay tax on the distributions – so it basically becomes another tax-deferred retirement account. A lot of HSA companies allow you to also invest your balance once you reach a certain minimum.
Next month, I begin my next series on Money in your twenties. So, stay tuned! And as always, reach out with any topics you’d like to see covered on the blog.
Carolyn Rowland is a CERTIFIED FINANCIAL PLANNER™ passionate about empowering individuals to take control of their financial landscape. “We often tend to place our own priorities on the back burner for others, resulting in sacrifices we don’t often realize we’re making.”Carolyn believes in taking a values-based approach to financial planning. “Together we’ll define what matters most to you, what you want your life to look like, and develop a plan that fits your lifestyle.”CC
Carolyn Rowland is in the Milwaukee WI, area.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid. Scholarship funds, and protection from creditors. Before investing in any states’ 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than qualified education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.