So im very new to investing. I have a fidelity account where i have my amazon 401k that i started 2 years ago along with a taxable brokerage account where all my amazon shares comes in when vested. Currently around 40. I recently started investing into other companies such as tsla last month.
My question are
1) if my goal is to retire early such as 40(currently 26) should i do this investing in IRA or my regular taxable brokerage account? I believe in my current account if i ever want to trade i would be hit with short term taxes etc. i do plan to swing around trades once in a while such as if stock A reaches from initial investment of 1k to 2k and now i wanna cash out all of it to put into stock B that has higher prospects i believe i will have to pay taxes on 1k, which means if i do a lot of these kind of trades in a year ill b owing a huge tax bill end of year. In ira are we tax ecery year on each trade and is ira for someone looking to retire before 60?
2) let say at age of 40 my stock portfolio reaches 5-6 mil and my whole net worth is distributed in a couple of shares such as tsla, amzn, aapl, msft. How do i retire then? Do i cash out all of this and put it into a stock that pay dividends and is less risky? If i sell all this positions i believe if 70% of it is growth i would have to pay massive taxes and my networth from 5 mil might end up being 3 mil in cash?
#personalfinance #investments
Tc : 230k
Networth: < 150k
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Note: keep in mind this only works if your risky bets win. If they tank and your tax-advantaged accounts are empty at retirement age it will suck. However if you want to actively trade and minimize tax burden this is the best approach.
You can claim losses
You have a limited amount of tax advantaged room and are more likely to lose it.
* Invest in index funds in an employer-provided 401k, at least enough to get any available matching. You can keep the 401k even after you leave the company and just let it grow until age 59.5 when there are no early withdrawal penalties.
* Invest in a wider range of possible investments in an IRA, also planning to keep it until the standard withdrawal age of 59.5.
* Invest anything you might use before age 59.5 as well as any extra investments in a taxable brokerage account.
People who are high earners and low spenders can max out the 401k and IRA and invest all excess cash in the brokerage account and potentially end up with more investments in the taxable account than the sum of everything else, giving lots of flexibility.
If you have a high deductible medical plan with a HSA (Health Savings Plan) option, you can invest HSA funds for tax-deductible contributions, tax-free interest/dividends/gains, and tax-free withdrawals so long as withdrawn money is only used for eligible medical expenses or taken out after age 65.
There are nice tax advantages to investing in accounts like a 401k/IRA/HSA so it's good to max those out until you're comfortable you'll have enough for your retirement life after age 59.5.
RE when you get taxed for a 401k or IRA:
* For a traditional 401k or IRA, contributions are tax-deductible, you pay no tax on gains, you do pay regular income tax on money you take out. (Only pay tax on the way out.)
* For a Roth 401k or Roth IRAs, contributions are from after-tax money, and you pay no tax on gains or withdrawals. (Only pay tax on the way in.)
There are no taxes on capital gains for trades you make in a 401k/IRA/HSA.
Any money you want to spend much earlier can stay in the taxable brokerage account.
For your second question, talk to a financial advisor who's worked with a lot of retirees to get specific advice on how to best plan and transition your investments as you get closer to retirement. I don't think it's a big issue to worry about this early if you're in your 20s, definitely a good conversation to have with a professional around 10 years away from planned retirement.
You can keep the remainder of the amount not transferred to the trust in trading account, real estate wherever you wish basically. This setup gives helps you strike a balance between having steady flow of income for your lifetime which grow as the fund grows and an access to capital for any one time big ticket expenses.