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Published December 26, 2012, 11:35 PM

Investing 101: Understanding the road to making your money grow

FARGO - You’re on the road to financial well-being. You’ve unloaded toxic debt and saved up several months’ expenses in an emergency fund. Now what? It’s time to get into the driver’s seat, and start investing your money. Investing is more than just saving.

By: Sherri Richards, INFORUM

FARGO - You’re on the road to financial well-being. You’ve unloaded toxic debt and saved up several months’ expenses in an emergency fund. Now what?

It’s time to get into the driver’s seat, and start investing your money.

Investing is more than just saving.

“Investing assumes we put money into something we hope will do one of two things,” says Paul Meyers of Legacy Wealth Management in Fargo, “either pay dividends … and allow the account to grow, or grow because it increases in value … or a combination of the two, which of course is the best.”

The first place most people start investing is in an employer-sponsored retirement account, such as a 401(k) or a 403(b). Meyers says employees should make sure they maximize the money going into the plan by contributing enough to get the full employer match.

From there, investors may want to explore individual retirement accounts (IRAs), college savings accounts such as a 529 plan, and individual brokerage accounts.

Each of these investment vehicles can be considered a “wrapper,” says Sandy Korbel, senior wealth management advisor at Alerus Financial. The wrapper influences how the money is treated from a tax standpoint.

But within each wrapper are similar investment choices, for example stocks, bonds, mutual funds, real estate investment trusts or certificates of deposit.

Investment options within a 401(k) or 529 are determined by the plan’s sponsor. IRAs and brokerage accounts offer more choices.

Korbel says she’ll hear people criticize a certain investment vehicle as not performing well, when really they need to look at the investment choices within that wrapper.

“Separate the savings mode from what you’re investing in,” she says.

Investors need to make sure they are diversified within these vehicles. Korbel suggests pre-allocated risk-based investment options. While some companies offer investment options targeted to a certain retirement date, these may not align with the investor’s risk tolerance, she says.

Korbel and Meyers also encourage investors to put their money in several different wrappers, or buckets, to ensure flexibility.

Money put into a 401(k) is pre-taxed and can only be used for retirement. Early withdrawals are subject to hefty taxes and fees. That’s why people may want to look at putting some money in a more flexible investment vehicle.

Contributions to a Roth IRA are after-taxed, and can be withdrawn at any time.

Meyers recommends parents invest in 529 plans for their children’s college savings, as they are tax advantageous and also flexible. For example, if the child beneficiary doesn’t go to school, the funds can be transferred to another family member.

A 529 plan can also be a good gifting mode for grandparents, Korbel says.

Korbel encourages people to save 10 percent of their income in a 401(k) and 15 percent total. When someone asks Korbel if they should put all their money in a 401(k) or a 529, she says to do a little of both.

“It’s not an entirely exclusive exercise,” she says.

Meyers says a non-qualified investment account can be a good option for many individuals or couples.

“These are not necessarily tax-deferred investments, but they will grow just the same and give you flexibility,” he says. “Investments these days are far more liquid.”

While anyone can open an investment account through an online broker, such as Fidelity, Meyers promotes the use of a financial advisor. Besides identifying opportunities to reduce tax liability, advisors can analyze an investment’s potential, for example analyzing its price-to-earnings ratio and looking at which sectors are strong (Meyers is optimistic about health care, biotechnology, housing and auto).

“There’s a fine line between what’s a good growth opportunity and what isn’t,” Meyers says. “I don’t think the vast majority of people want to become stock market gurus or wild experts at picking stocks.

“There are so many choices in the world of investing. You don’t want to take that trip without some kind of guide,” Meyers says.

Learn about the different investment vehicles available

On the road of investing, there are several different vehicles investors can choose from. Within each vehicle are many investment options. Which options an investor chooses should depend on age and risk-tolerance. Here are the nuts and bolts about four types of investing vehicles.

EMPLOYER-SPONSORED RETIREMENT ACCOUNTS

• These may be 401(k), 403(b) or 457(b) plans, depending on the employer.

• Employees will be able to contribute up to $17,500 in elective deferrals in 2013 ($17,000 in 2012). Participants age 50 and older may be able to contribute an additional $5,500 in catch-up contributions.

• Dollars contributed to these plans are not taxed when invested, but are taxed when withdrawn. More employer-sponsored plans now offer a Roth option in which the contributions are taxed now, but distributions are not taxed.

• Distributions before ages 59½ are subject to an early withdrawal penalty of 10 percent in additional taxes.

INDIVIDUAL RETIREMENT ACCOUNTS (IRA)

• Are typically either traditional (pre-tax) or Roth (post-tax).

• Maximum contributions per year in 2013 will be $5,500 ($6,500 for individuals age 50 or older). The limit for 2012 is $5,000 ($6,000 for ages 50-plus). Contributions cannot exceed income.

• Income limits apply, reducing or eliminating allowable contributions. For example, a married couple filing jointly who make more than $188,000 cannot contribute to a Roth IRA in 2013.

• Withdrawals can be taken from a traditional IRA without penalty at age 59½. Traditional IRA owners age 70½ must take required minimum distributions.

529 COLLEGE SAVINGS ACCOUNTS

• Options for college savings include a 529 plan, Coverdell Education Savings Account or Unified Gifts to Minors Act. Most financial advisors recommend a 529. Each state has its own 529 plan. Though anyone can participate in any state’s plan, 529s typically offer additional incentives to in-state residents.

• Earnings are not subject to federal tax and are generally not subject to state tax when used for qualified education expenses.

• There are no income restrictions on the contributor or the beneficiary.

• Contributions cannot exceed the amount necessary to pay for the qualified education expenses of the beneficiary. Maximum contributions to North Dakota’s 529 plan cannot exceed $269,000.

INDIVIDUAL BROKERAGE ACCOUNTS

• Are considered non-qualified investments, as these typically are not tax-deferred or tax-advantaged.

• Can be opened through a traditional brokerage firm or an online discount broker. Some banks also offer investing services through their trust departments.

• Provide greatest flexibility in investment options and access to contributions and earnings.

• Minimum investment amounts vary, as do commissions and fees.


Sources: www.irs.gov, collegesave4u.com, interviews with Paul Meyers and Sandy Korbel


Readers can reach Forum reporter Sherri Richards at (701) 241-5556

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