| How to Prepare for College and Retirement, Part 4 |
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Consider putting aggressive growth investments into Roth accounts. A Roth IRA and Roth 401(k) are different from other retirement accounts. The money that goes into a Roth account does not give you any immediate tax benefit, but over time it can grow tax-free. This means that if you can get $3,000 of investment to grow to $10,000 in value, you'll have $7,000 of earnings on which you will never be taxed. Think of a capital gain as your friend. If you sell investments that have increased in value, unless they're in a tax-deferred account like an IRA or 401(k), you'll likely owe tax on this gain. People hate to pay this capital gains tax, partly because they usually have to write a check to the IRS to do it. Actually, on ordinary long-term investments, capital gains tax rates are lower than the tax rate you pay on the income that you earn at your job or business. Pay your capital gains taxes as soon as you make a taxable sale. Doing so reduces the chance of an underpayment penalty when you file your return. This also keeps you from spending the money you should have set aside for the tax liability. Write checks to the IRS and any other applicable taxing authorities, and send them as soon as you have the proceeds from the sale. Remember, even if income tax is withheld from the proceeds, that amount isn't always enough. Consult your tax advisor. Use mutual funds for your equity investments. Most of us don't have the time to properly analyze individual stocks or the money to diversify them adequately. Many mutual fund investments give you a low-cost way to make sure your money is professionally managed and diversified. Understand that not all mutual funds are the same. While two funds might be similar to one another, other mutual funds are as individual as fingerprints. Make sure you understand exactly what fund you're investing in and whether it's right for you. |
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