Setting Up Your First Investment Account

If you have a retirement account such as a 401K, 403B, Roth or Traditional IRA, Congratulations! You’re already an investor. A lot of people don’t consider their retirement savings as investing. Saving for retirement is important and should (arguably) be your first investing priority because:

• It helps lower your tax liability either today or in retirement (depending on the type of account)

• You’re possibly getting free money from an employer (if there is a match program)

• It can easily be automated, so building your nest egg becomes habitual

• It can help you achieve financial independence and be able to walk away from the need to earn a paycheck

If you’re not yet saving for retirement, I urge you to start today. It is extremely beneficial to start saving for retirement early so that you can take advantage of compound interest.

Employer 401K

If your employer offers a 401K plan then you’re in luck and won’t have to do this yourself. However, do make sure you are saving up to the point where you get the employer match. An employer match is when an employer puts money in your retirement plan, matching your contribution up to a certain percentage. For example, your employer might have a contingency that they will match you 100 percent up to 4%. If you earn say, $40,000 - in order to get the full 4% match, you will have to contribute at least 4% of your salary into the 401K. That is, about $66 per biweekly paycheck (or $133 per month) and so does your employer. You would have saved roughly $1600 per year in your 401K and receive an additional $1600 from your employer making it a total of $3200 (half of this was free money).

The great thing about a 401K is that the money you save is automatically deposited into the plan before it’s taxed, so less of your income will be taxed now. Plus, the 401(k) allows your savings to grow tax-free until you withdraw the money at retirement. This feature means your money will compound at a faster rate. Only when you withdraw money will you pay taxes. Read more about the types Retirement Accounts here.

If you don’t have a retirement plan with your employer or are self employed, a retirement account is very easy to set up.

Here’s how to to Set up Your Own Retirement Account

1. Decide How Much You Want to Save

   If you’re following the 50/30/20 rule, then you should already have in mind to put 20% of your income towards saving and investing. So, you may decide to put between 10-15% of this allocation towards investing to yield a respectable nest egg. Consider the example of a 30 year old taking home a $50,000 salary. If he/she gets a 3% salary bump on average each year, and her investments earn an average annual return of 7% during her working life, then saving 15% of her income would yield $1.7 million by the time she reaches age 65. That is the power of starting early and of compound interest.

2. Decide What Types of Investments You Want

   If you’re not eligible for a retirement fund at work that gets you matching funds, you can sign up for a Roth IRA or Traditional IRA. A Roth IRA is funded with money out of your paycheck that has already been taxed (post tax dollars), but when you withdraw the money in retirement, it will be tax-free. While a Roth IRA won’t save you money on taxes this year, it’s a fantastic way to avoid paying taxes on your future investment earnings. A Traditional IRA on the other hand utilizes pre-tax dollars. This gives you the ability to lower your taxable liability today but you will be required to pay taxes on it in retirement.

   If you’re self employed or the owner of a small business you have the option of setting up a SEP IRA, Solo 401k or SIMPLE IRA. You can get more information about those types of Retirement Accounts here.

   The type of Investment will depend on your time horizon (how long you have to invest). For example, a younger person will have a longer time to invest. It is advisable that when starting out you stick to an all-in-one fund also known as a target date-fund. Target-date funds are a convenient way to save for retirement because it removes the overwhelming investment choices to put into your retirement account. In this fund, you select a year closest to when you feel you will retire. For example, If you are 30 years old and you want retire at age 65 then it will be Target Date Fund 2055. The fund’s managers will then automatically invest you in a primarily aggressive portfolio now and then rebalance it to be a more conservative portfolio by time you plan to retire.

3. Choose Where to Open Your Account

   There are plenty of options when it comes to opening a retirement account. Brokerage firms, banks, and other financial institutions offer a myriad of options to hold investments (i.e stocks, mutual funds, bonds and cash, earmarked for retirement). Where you choose to open an account will depend on the type of investor you are, hands-on or hands-off. If you have a little experience with investing and would like to buy and sell, an online broker may be the most beneficial. Consider building a portfolio out of low-cost index funds and ETFs. This approach makes it easier to ensure adequate diversification in your portfolio (which lowers your investing risks) and helps minimize the fees you’ll pay. Look for a broker that has low or no account fees and small commissions; offers a wide selection of no-transaction-fee mutual funds and commission-free exchange-traded funds; and provides solid customer support and educational resources, especially if you’re a new investor. Some great options are Vanguard,Fidelity, ETrade, Charles Schwab, Edward Jones, and TDAmeritrade to name a few.

   A hands-off approach is an automated way to manage your investments using a robo-advisor. A robo-advisor will choose low-cost funds and rebalance your portfolio, keeping it in line with your investing preferences and timeline for a fraction of the cost of hiring a human financial advisor. This option is usually better for those who agonize over investment decisions. Look for one with a low management fee, generally 0.40% or less, and services that meet your needs.

   If you decide to use a robo-advisor for your IRA, you don’t actually need to choose your investments. Your robo-advisor will ask you for your goals and preferences and select investments that match up with them, and even adjust those investments over time. Some great robe-advisors are Robinhood, Betterment, Ally Invest, and Acorns to name a few.

4. Fund Your Account and Get Started

   After you’ve figured out how much you want to invest, the type of account you want to invest in and where, all that’s left to do is fund your account and get started. Put your money in and automate it so that a set amount comes out of your bank account each month. That’s it, you’re done.

If you’re starting out as an investor there’s no better way to start than with a retirement account. Choose a broker or financial institution, fund your account, select a few investments (stocks, mutual funds, ETFs), automate it, and put your money to work. Your future self will thank you!

This is Part II of The Investing Series. Click here for Part I.

Over the next couple weeks I will be breaking down the topic of Investing and providing ways in which you can start investing right away. Sign up below to receive the Investing Series directly to your inbox:

This article is for educational and informational purposes only. Contact a financial advisor before making any financial decision.

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Retirement Planning for Young Professionals in 2020

2020 Retirement Contribution Limits

It is never too early to start saving towards retirement. A main focus for many of us this year will be our money management and long term goals i.e retirement planning. It is very important o have some knowledge of compounding interest to fully understand the benefits of starting early. In this post I will cover some basics of retirement planning and hopefully compel every young professional to start saving towards retirement (if you haven’t already).

I must remind you that retirement planning is a long term investment. In most cases you will not be able to access these funds until around age 59 1/2 without severe ramifications (taxes + penalties). So, if you are investing and need to access your funds sooner than this, you may have to think of other types of investments, which we will talk about in a subsequent post.

There are many different accounts and plans available and choosing the right one is very important as they each have different benefits and advantages, especially when it comes to tax planning. Here are a few to help you get started:

Simple IRA (Savings Incentive Match Plan for Employees)

For the year 2020, participants can make employee contributions of up to a maximum of $13,500 per year if you are under 50 years old and $16,500 if you are older than 50. This is a retirement plan that is usually available to self-employed individuals, however both employee and employer contribute to this account. Contributions are non tax deductible.

Traditional IRA

Anyone can open a traditional IRA account - but honestly, if you are a dentist or physician (like most of my colleagues are), then there really is no use for this type of account. During residency you have the option to open a Roth IRA (more on that below) because your lower salary allows you to stay within the income restrictions. Later as you start your career and your salary increases you will most likely surpass the income caps and will have the ability to deduct your traditional IRA contributions. However, it’s worth understanding as it forms the framework for all other types of retirement accounts. A Traditional IRA is set up by you (not an employer) and the maximum contribution to this type of account is $6,000 if you’re under 50 years old and $7,000 if you’re older. The contributions are tax deductible and grows tax-free.  If you withdraw the money prior to age 59 1/2, there will be ramifications of a 10% tax (penalty) as well as any income tax which would be owed on the money.  After age 59 1/2, you just have to pay the income tax based on your tax bracket at that time.  At age 70, you will be required to start withdrawing part of the money each year, the “Required Minimum Distribution (RMD).”  This is age based and starts out at about 3.6% and increases to about 8.8% at age 90.  

Roth IRA

I absolutely love a Roth IRA. However, there is a contribution income limit. If you make more than $124K (single) or $196K (married), you cannot contribute to a Roth IRA. However, there are ways to get around that with Roth IRA conversions, which we will discuss in a subsequent post. Anyone with earned income can open a Roth IRA and contribute up to $6000 per year.  If income is sufficient, one can also open a Spousal Roth IRA and contribute another $5000.  If you’re over 50, those limits are raised to $7000 per year.

The reason I love a Roth IRA is because you contribute with after-tax money, but it is never taxed again!  You don’t pay taxes on capital gains and dividends as the money grows, and it comes out tax-free in retirement.  You generally can’t access the money before age 59 1/2, but unlike a 401K or Traditional IRA there are no required minimum distributions beginning at age 70.

401K

If you are an employee of a company and your employer offers a 401K retirement plan, there’s absolutely no reason why you should not be participating. It is even more important that you participate if said company is offering a match. A match is basically free money! Do not leave free money laying on the table. The contribution maximum for the year 2019 is $19,500 and the great thing about a 401K is that you are investing pre-tax dollars. The not-so great thing is that when you go to retrieve your money (after age 59 1/2), you will be taxed on this (unlike with a Roth IRA).

If you're an Independent Contractor (not a W2 employee), you’re considered to be “running your own business.” In this case, you can also make an employer contribution of 20% of your net income up to $55,000.

SEP IRA (Simplified Employee Pension)

If you have your own practice, a SEP IRA may be a good option. This allows you to contribute 25% of your business profit or $57,000 per year, whichever is less. The contributions are tax deductible, and investments grow tax deferred until retirement.

This is not a comprehensive list of retirement vehicles but it’s a great place to start. Everyone, as early as possible, should start contributing to one of the above. Speak with your financial planner or accountant for more clarification about which plan is best for you. Hope this helps in getting started.

Asset Protection For Young Professionals

Asset protection is a hot topic among young professionals. Let’s face it, we spent years in school and sacrificed a lot to get to this point so it’s only right to search for ways to protect what we’ve earned. Asset protection is a term used to describe the way we go about protecting our finances from those who see us as a target. These may be creditors, individuals looking to sue, etc. Everyone needs to give thought to this but there are some groups, namely physicians and dentists that are more vulnerable to legal action.

• Malpractice Insurance

  • Whether you’re a physician, dentist, or any other type of healthcare professional, having malpractice insurance is not only important but necessary. Approximately 34% of doctors will have a lawsuit or judgement against them in their lifetime, according to the American Medical Association. Be sure to purchase a malpractice insurance policy that provides the best coverage for your specialty.

• Retirement Accounts

  • Having retirement accounts are very important, but many of us are not aware how it provides asset protection benefits. All qualified retirement accounts provide complete protection from a broad array of creditor classes, including malpractice and bankruptcy creditors. Putting money away for retirement allows you to contribute to tax deductible and tax deferred accounts.

• Creating a Corporation

  • A Limited Liability company and a corporation are business entities that are separate from the owner of the business. You can create a corporation and become an employee of your own company. That way, if anyone should come after you personally or if a judgement was ruled against you it would only affect the income which you earned as an employee working for said cooperation.

• Pre-Nuptial Agreement

  • For some this can be a touchy subject but many couples are getting married at a later age and may have acquired assets prior to marriage. A prenup is a very good idea for a young doc. It gives you a chance to have control over how assets are divided in the event the marriage ends in divorce. You get to make these decisions while you still love each other without interference from the state. 

• If you get married, STAY Married

  • When discussing asset protection, we think about how to protect ourselves if we are sued. However, you are far more likely to lose assets to your spouse than to a disgruntled patient. Believe it or not, many times when a doctor or other young professional loses assets it’s through divorce. Come up with ways to stay connected with each other throughout the years and keep your marriage fresh! hint: Don’t stop dating each other.

Use the above bullet points as a place to begin and start protecting the assets you worked so very hard to acquire.

Retirement Planning for Young Professionals

*Updated to reflect 2019 Increases

It is never too early to start saving towards retirement. As the new year approaches everyone is setting their goals and intention for the coming months. A main focus for many of us will be our money management and long term goals(retirement planning). It is imperative to have some knowledge of compounding interest to fully understand the benefits of starting early. In this post I will cover some basics of retirement planning and hopefully compel every young professional to start saving towards retirement(if you haven’t already).

Before moving forward, I must remind you that retirement planning is a long term investment. In most cases you will not be able to access these funds until around age 59 1/2 without severe ramifications (taxes + penalties). So, if you are investing and need to access your funds sooner than this, you may have to think of other types of investments, which we will talk about in a subsequent post.

There are many different accounts and plans available and choosing the right one is very important as they each have different benefits and advantages, especially when it comes to tax planning. Here are a few to help you get started.

Simple IRA (Saving Incentive Match Plan for Employees)

For the year 2018, participants can make employee contributions of up to a maximum of $12,500 per year if you are under 50 years old and $15,500 if you are older than 50. Both employee and employer contribute to this account. Contributions are non tax deductible.

Traditional IRA

Anyone can open a traditional IRA account - but honestly, if you are a dentist or physician (like most of my colleagues are), then there really is no use for this type of account. During residency you have the option to open a Roth IRA (more on that below) because your lower salary allows you to stay within the income restrictions. Later as you start your career and your salary increases you will most likely surpass the income caps and will have the ability to deduct your traditional IRA contributions. However, it’s worth understanding as it forms the framework for all other types of retirement accounts. A Traditional IRA is set up by you (not an employer) and the maximum contribution to this type of account is $6,000 if you’re under 50 years old and $7,000 if you’re older. The contributions are tax deductible and grows tax-free.  If you withdraw the money prior to age 59 1/2, there will be ramifications of a 10% tax (penalty) as well as any income tax which would be owed on the money.  After age 59 1/2, you just have to pay the income tax based on your tax bracket at that time.  At age 70, you will be required to start withdrawing part of the money each year, the “Required Minimum Distribution (RMD).”  This is age based and starts out at about 3.6% and increases to about 8.8% at age 90.  

Roth IRA

I absolutely love a Roth IRA. However, there is a contribution income limit. If you make more than $120K (single) or $179K (married), you cannot contribute to a Roth IRA. However, there are ways to get around that with Roth IRA conversions, which we will discuss in a subsequent post. Anyone with earned income can open a Roth IRA and contribute up to $5000 per year.  If income is sufficient, one can also open a Spousal Roth IRA and contribute another $5000.  If you’re over 50, those limits are raised to $6000 per year.

The reason I love a Roth IRA is because you contribute with after-tax money, but it is never taxed again!  You don’t pay taxes on capital gains and dividends as the money grows, and it comes out tax-free in retirement.  You generally can’t access the money before age 59 1/2, but unlike a 401K or Traditional IRA there are no required minimum distributions beginning at age 70.

401K

If you are an employee of a company and your employer offers a 401K retirement plan, there’s absolutely no reason why you should not be participating. It is even more important that you participate if said company is offering a match. A match is basically free money! Do not leave free money laying on the table. The contribution maximum for the year 2019 is $19,000 and the great thing about a 401K is that you are investing pre-tax dollars. The not-so great thing is that when you go to retrieve your money (after age 59 1/2), you will be taxed on this (unlike with a Roth IRA).

If you're an Independent Contractor (not a W2 employee), you’re considered to be “running your own business.” In this case, you can also make an employer contribution of 20% of your net income up to $55,000.

SEP IRA (Simplified Employee Pension)

If you have your own practice, a SEP IRA may be a good option. This allows you to contribute 25% of your business profit or $55,000 per year, whichever is less. The contributions are tax deductible, and investments grow tax deferred until retirement.

This is not a comprehensive list of retirement vehicles but it’s a great place to start. Everyone, as early as possible, should start contributing to one of the above. Speak with your financial planner or accountant for more clarification about which plan is best for you. Hope this helps in getting started.