How Do I Choose the Right Investments for Me?

Q: I’m ready to invest in my future. How do I choose the investment that’s right for me?

A: Investing your funds is a great way to secure your financial future, but the choices can be dizzying. Here’s what to know about the most common beginner investments:

Retirement plans

401(k) is an employee-sponsored retirement plan allowing eligible employees to save and invest for their own retirements on a tax-deferred basis.

Goal: Save for retirement.

Pros: Contributions are tax-free and there’s generally no minimum for contributions.

Cons: Few investment options, may have high account fees and early withdrawals are penalized.

Best choice for: All employees with a W-2.

Best age to invest: As soon as you start working at your first job.

IRAs 

Goal: Save for retirement.

Pros: Contributions and investment earnings aren’t taxed. Contributions may be tax-deductible.

Cons: Withdrawals during retirement are taxed at your tax rate during that time. At age 70½, you are no longer allowed to make contributions and must begin taking distributions.

Best choice for: Individuals who are currently in a higher tax bracket than what they

anticipate being in during retirement.

Best age to invest: Age 18, or the minimum age allowed in your state.

Roth IRAs 

Goal: Save for retirement.

Pros: Withdrawals are tax-free. There is no age limit for making contributions.

Cons: Contributions and growth are taxed and are not tax-deductible. Income limits for

eligible contributors.

Best choice for: Individuals who anticipate being in a higher tax bracket during retirement.

Best age to invest: Age 18, or the minimum age allowed in your state.

529 plans

It’s never too early to start saving for college!

There are two primary types of 529 plans:

529 savings plans offer a place for tuition savings to grow, tax-deferred.

Goal: Save up for tuition costs and related expenses, like room and board.

Pros: Contributions and growth are tax-free. Withdrawals are also tax-free, as long as  they’re used for qualified education expenses. Can be used for K-12.

Cons: May have high fees.

Best choice for: Parents looking to save for their child’s college tuition.

529 prepaid tuition plans allow the account holder to save for tuition payments.

Goal: Prepay tuition costs at designated universities and colleges.

Pros: Lock in lower tuition rates. Make high tuition payments more manageable by spreading them over a number of years.

Cons: Tuition payments are only accepted by a limited number of colleges.

Best choice for: Parents of students who know which college they will be attending and want to lock in lower tuition rates.

Best age to invest: It’s best to open any kind of 529 as soon as the child is born.

Annuities

An annuity is a contract between a contract holder, or annuitant and an insurance company. The contract stipulates that the insurer will pay the annuitant a predetermined amount of money on a periodic basis and for a specified period, in exchange for regular contributions.

There are two primary categories of annuities:

Immediate annuities require the annuitant to give the insurance company a lump sum immediately and then begin receiving payments right away.

Deferred annuities allow the annuitant to make contributions throughout their working life, which can be converted into an income stream when the annuitant reaches retirement.

Goal: To guarantee a regular income stream even after retirement.

Pros: Earnings generally grow tax-deferred. Withdrawals are taxed at the same tax rate as the annuitant’s income.

Cons: May have high fees. There is generally also a minimum age for withdrawals; early withdrawals are penalized.

Best choice for: Immediate annuities can be a good choice for individuals who have had a one-time windfall. All annuities can be a beneficial addition to a retirement plan.

Best age to invest: In general, the best age range for purchasing annuities is between 40-70.

Life insurance

No one likes to talk about life insurance, but the earlier you open a policy, the better.

Life insurance is an agreement that an insurance provider will pay a sum of money to a designated beneficiary when the policyholder passes on, in exchange for monthly premiums.

Goal: Ensure that one’s family will be provided for after their passing.

Best choice for: Anyone looking to secure their children’s future.

Best age to invest: Individuals in their 20s and 30s will likely get the best rates.

There are two primary kinds of life insurance:

Term life insurance only covers the insured for a set term.

Pros: Cheaper premiums and more flexibility.

Cons: No cash value; may not serve its purpose if the policyholder outlives the term.

Permanent life insurance covers the insured for life as long as the premiums are paid.

Pros: Tax-deferred growth, lifetime coverage and cash value for loans.

Cons: Costly premiums and less flexibility.

Your Turn: Do you have another beginner investment to add to our list? Share it with us in the comments.