This is the best place to invest money at the start of your career

When it comes to investing, the best thing to do is get started. Early in your career, you have access to one of the most critical investment assets: time. Since not all investment accounts are created equal, you need to know which ones are best for specific purposes.

Here is the best place to invest your money at the start of your career.

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Enjoy a Roth IRA

If you’re a long-term investor, you’re probably striving to be financially comfortable until you reach retirement. Fortunately, retirement accounts are designed to allow you to invest for your retirement while receiving special tax breaks. While many jobs offer 401(k) plans, fewer people are taking advantage of IRAs.

There are two types of IRAs, traditional and Roth, but you should consider taking advantage of a Roth IRA early in your career due to tax advantages and possible income limitations. You contribute after-tax money to a Roth IRA. The money grows tax-free until you choose to withdraw it when you retire. You can start making unlimited withdrawals at age 59 1/2. Unlike a 401(k), there is no minimum distribution required.

Roth IRAs also have income limits in place that prevent people above a certain income level from contributing. For the 2022 tax year, single filers earning more than $144,000 and married couples (filing jointly) earning more than $214,000 per year are not eligible to contribute to a Roth IRA.

Your salary will likely be lower at the start of your career, so you’ll want to consider taking advantage of the account while you’re eligible. A lower salary will land you in a lower tax bracket. Paying taxes on your money while you’re in a lower tax bracket means you won’t have to pay higher taxes when you withdraw it in retirement.

In contrast, you contribute pre-tax money into a 401(k) and a traditional IRA works the same way. Instead of watching your money grow tax-free, you can deduct your contributions from your taxable income (your income determines the amount). Because you get the tax benefit initially, you’ll pay tax on withdrawals – which are mandatory at age 72 – upon retirement.

Use index funds

With a 401(k) account, your provider gives you investment options to choose from. However, a Roth IRA works like a brokerage account in that you can buy stocks or exchange-traded funds (ETFs) from any company. Since you have access to this range of investments, you should consider taking advantage of index funds.

Index funds are like a basket of investments in a single investment. Instead of researching and buying the stocks of each company you’re interested in individually, you can buy an index fund made up of many different companies. For example, the S&P500one of the most popular index funds, consists of the 500 largest US companies by market capitalization.

Being able to buy multiple companies at once – whether by size, sector or social initiative – can give investors access to instant diversification, which is one of the key elements of a good investment portfolio.

Schedule time to do much of the work for you

More than anything, you need to take advantage of time and compound interest, and no other type of account helps you do that more than a Roth IRA, mainly because you paid taxes on the money and it is compounded tax-free. Even if you only invest your money in an S&P 500 fund (which historically returns around 10% per year), here’s how much you’d have in 30 years at different monthly contributions to your Roth IRA:

Monthly fee Interest rate Account value after 30 years
$500 ten%

$986,900

$1,000 ten%

$1.97 million

$2,000 ten%

$3.94 million

Data source: Author’s calculations.

Of course, you would get the same results if you did the same thing in a regular brokerage account, but the difference is that the money in a Roth IRA will be tax-free when you withdraw it. If you wanted the money from your brokerage account assets, you would have to sell them, which would trigger capital gains taxes.

Depending on your tax bracket, this could mean paying up to 20%. If you earn $100,000 – putting you in the 15% capital gains tax bracket – and need to withdraw $1 million over time, you will pay $150,000 in taxes.

Slowly but surely, we are succeeding. If you use dollar cost averaging, make consistent contributions to your Roth IRA, and let compound interest do its thing, chances are you’ll be financially well off in your later years.

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