There are so many investment vehicles out there that it can be confusing and overwhelming when deciding which one to choose. With the little bit of extra money that you have available, should you contribute to your 401K, should you contribute to a Roth IRA, or should you contribute to a 529?
Which account will save you the most money and grow your money the quickest?
After you have paid off all of your high interest debt such as credit cards and student loans, consider prioritizing these Top 4 Places to Invest your Extra Money so you can make an informed decision to maximize your wealth management.
1. COMPANY MATCHING
If you are fortunate enough to work for a company that matches what you put into your retirement account, then this is a priority. Not only is this the FIRST location that you should be putting your “extra” money, but it is the smartest place.
Some companies like Johnson and Johnson, General Dynamics, and even the Federal Government provide a matching incentive to encourage employees to start saving for their retirement.
The companies above match dollar for dollar up to 5% of the employee’s salary. If you make $100,000 a year, and the company matches up to 5%, you NEED to be putting at least 5% of your salary into a retirement plan. It is free money!
With you putting in $5,000 a year, and the company putting in $5,000 a year, you have 10% of your salary working for you on your road to retirement. Some companies match more, while some match less, but if there is any matching incentive offered, you MUST take advantage of it.
2. ROTH IRA
If your Adjusted Gross Income falls within the limits to be eligible for investing into a Roth IRA, this is the SECOND location that you should be investing your “extra” money.
For 2019 and 2020 tax years, you can contribute up to $6,000 per Roth IRA account. This should be maxed out if you are able to.
All of the investment gains grow TAX FREE along with potential lower tax bill implications when withdrawing after your retire.
An added benefit is if your Roth IRA account is open for 5 years, then you can withdraw the investment gains to help purchase your first home or to pay for qualified education expenses without any penalty. Click here for more information on Roth IRAs.
The highest performing brokerage account with the smallest fees that I have found is E*TRADE. They constantly outperform the S&P and have a wide variety of accounts to select from. Click here to start an E*TRADE Roth IRA Account today
3. 529 ACCOUNT
If you would like to start saving for your child’s secondary education, the THIRD location you should be investing your “extra” money is into a 529 Account.
This account provides you federal tax benefits by not taxing your investment gains when you withdraw the money as well as State Income Tax benefits for the year that you contribute.
For example, New York allows you to deduct up to $5,000 from your New York State Income taxes. If you have an extra $6,000 then you should contribute $5,000 toward your 529 account and the remaining $1,000 toward your standard 401K or 403b plan described below. Click here for more information on 529 Accounts.
The top two states that offer 529 accounts are California and New York. These are better than most because they provide the most opportunities and flexibility for using the money that you invest.
4. 401K/403b/THRIFT SAVINGS PLAN/SEP
The FOURTH location that you should be putting any left over money that you plan on saving for retirement is in your standard work retirement account. The yearly limit to contribute to your retirement account for 2020 is $19,000.
Only after you maxed out all of the other items listed above should you be putting money into this account. This account takes priority over other items such as paying down your mortgage or paying off your car.
The earlier you can get money into a strategic market retirement account, the quicker you will see your wealth management grow.
Hopefully this prioritization for investing into retirement and education makes it a little easier when deciding where to put your money and how much.
It takes a lot of the guess work and stress out of trying to decide the best approach, because it really comes down to where you get the greatest tax breaks and investment strategies.
The Top 4 Places to Invest your Extra Money should be Company matching, Roth IRA, 529 Account, and then 401K. If you follow this order, you will be getting the most out of your money.
Eugene is a Chemical Engineer with a passion for personal finance and is constantly learning new tricks to make his money work for him. He obtained an MBA part time and hasn’t stopped finding ways to make money, save money, and properly invest money. He currently lives at the Jersey Shore with my wife and two children.