Investment Options

Posted by A. Caleb Hartley on March 3rd, 2008 filed in investing, retirement

I am not a financial expert.

The above is my disclaimer - take everything you hear here with a grain of salt (here here!).  Run it past your accountant.  Ask your financial planner about it.  Read up about it elsewhere online.  Ask your mom.  Heck - flip a coin!  The point is: the final decision-maker for your finances should be you, not me.  I’m just here to help.

Now that we’ve gotten that out of the way - onwards toward an eco-retirement! 

For your investing pleasure, you have several options.  Here is a (not comprehensive) list of some of the most common options people use to save and invest:

• 401k: a type of employer-sponsored defined contribution retirement plan under section 401(k) of the Internal Revenue Code in the United States and some other countries. Allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or “deferred”, into his or her 401(k) account. (wikipedia)
• IRA: An Individual Retirement Account (or IRA) is a retirement plan account that provides some tax advantages for retirement savings in the United States. (wikipedia)
  • Traditional IRA: Contributions are often tax-deductible, all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.
  • Roth IRA: Contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
• 529 Plan: A tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. (wikipedia)

The above are the most common options used to invest for certain goals - the IRA and 401k options being retirement-focused, and the 529 Plan being education-focused.  There are also other options, such as Coverdell Education Savings Accounts.

In general, you’ll find that 401k plans are the easiest to start - if your employer offers them.  Assuming you have a 401k plan available to you through your employer, all you need to do is speak to your Human Resources / Compensation & Benefits department and they will help you get set up.  You choose how much of your income to deposit into the account (it can be a specific dollar amount per paycheck or it can be a percentage of each paycheck).  Your employer will generally match a certain amount of your deposit.  A common match is 50% of whatever you save, up to a certain percentage of your pay, like 6%.  What this means is that if you save 6% of your income, your company will give you another 3% - so you put away a total of 9% of your income, but it only costs you 6%!  There are also tax-savings that make it even more palatable, but thet is way beyond the scope of this post.

Similar to the 401k is the Traditional IRA.  Essentially, you can use any deposits to a traditional IRA as a tax-deduction, saving you some money on your taxes; however, you don’t get the benefit of a company match when you use this option.

A Roth IRA is similar to a traditional IRA, but contributions are not tax-deductible.  Why would you bother using a Roth IRA, you ask?  Because once you retire, a Roth IRA’s distributions are not taxable as income!  Both the 401k and the traditional IRA’s distributions are taxed as income to you when you take money out of them.  It’s called tax-deferral because you don’t pay taxes on it today - you pay taxes on it years from now, when you are retired and pulling the money out of the account.

529 Plans are generally a little different, in that they are not self-directed.  This means that you don’t get to choose the investments - they are chosen for you by an administrator and based on the age of the student you are saving for.  Aditionally, these plans are administered by state, not the federal government.  It’s possible that these plans have green investing options, but not likely.  We won’t really discuss them any further.

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If you have a 401k plan, it is most likely administered by a financial company contracted by your company, such as Fidelity or T. Rowe Price or some other company of the sort.  This company will offer you certain mutual funds or index funds to invest in.  Generally, there are few, if any, green options in these plans.  Unfortunately, you may be stuck with it if you want the free money your company gives you with its match.  Contact your Comp. & Benefits department to ask for socially-screened or green funds if you don’t have any options in your current plan.  Both of the IRA options above, however, can be completely self-directed - meaning you can choose individual stocks, mutual funds, bonds, or any other kind of investment you would like.  This is the easiest way to ensure that you are investing only in companies and industries you approve of - but it is the most labor-intensive way to actaully invest.  Fortunately, there are many options that allow you to avoid companies you disagree with - or to purchase companies you like - without knowing much about investing in general.  IRAs can be opened through the same companies mentioned above, or through online brokerages such as TD Ameritrade or E*Trade.We’ll discuss some of the different investments available to you in the next environ-financial-tastic! installment.

Namaste,
A. Caleb Hartley

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What do you think so far? Am I on the right track? Is this too technical? Not technical enough? Should I have left this topic to a financial blog like The Money Kings? Let ‘er rip in the comments!

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