Here’s how young people should invest their first $10,000November 23, 2016
This original article was written by Kathleen Elkins for CNBC.
If you want to build wealth, put your money to work — and start early. Time is on your side when you’re young, thanks to the power of compound interest.
But a lot of people feel overwhelmed when starting out. How can they maximize their savings?
CNBC got answers from certified financial planner and founder of Gen Y Planning Sophia Bera about where young people should invest their first $10,000.
“Max out your health savings account (HSA) and Roth IRA,” she says. Those accounts will help provide for you both in the present and in the future.
Health Savings Accounts
With an HSA, you can put pre-tax money towards medical costs to be used whenever you want. There’s no “use-it-or-lose-it” rule — any unused funds will roll over year to year.
The main requirement for opening an HSA is having a high-deductible health care plan (HDHP), a plan that offers a lower health insurance premium and a high deductible.
“HSAs have a triple tax benefit,” Bera explains. “The money is tax deductible when you put it in, it grows tax deferred, and you can take it out tax free if used for qualified medical expenses.”
What’s more, an HSA can be a powerful retirement-savings tool. Depending on your situation, some financial planners advisemaximizing contributions to your HSA even before maxing out your 401(k) plan.
Another retirement account worth investing in is a Roth IRA.
“With a Roth IRA, you pay the taxes up front, but the money grows tax free and you don’t have to pay taxes on it when you withdraw it in retirement,” Bera explains.
It’s a particularly good option for millennials because younger workers will likely be earning less today than they will be in the future, meaning they’ll be in a lower tax bracket and paying less in taxes than they may later on.
Note that in order to contribute to a Roth IRA, there’s an income cap: $117,000 a year or less for individuals and $184,000 or less for married couples filing jointly. (If you don’t qualify for a Roth, you can still open, and benefit from, a traditional IRA.)
There are also contribution limits for both investing vehicles. For 2016, an individual can contribute up to $5,500 for a Roth IRA ($6,500 if you’re 50 or older). An individual can contribute up to $3,350 per yearto an HSA and families can contribute $6,750.
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