Last year, I prioritized contributing to my 403b. Nowadays, I use the income from some of my side gigs and other jobs to contribute to a Roth IRA as well. If you are considering doing the same thing (by contributing to your employer-sponsored retirement plan and your own Roth IRA), here are a few steps you can follow:
Step 1: Have a plan for all your retirement investing. My investment portfolio is overwhelmingly filled with stocks. As someone who is [relatively] young with plenty of work years ahead of me, I’m decades away from retirement. Since I won’t retire for a while, I can include a high percentage of stocks and take more risks with my investments. By taking more risk, I increase my chances of making a profit on my money. Even if I “lose” money intermittently by taking so much risk, I have plenty of years to make up the losses, if they occur.
The percentage of stocks you have in your investment portfolio may be different. There are various investment allocations for people of all ages and stages of life with various risk tolerances. Some younger people choose to only invest in stocks, some choose to invest in stocks and bonds, and others like to have some real estate, commodities, or other alternative options. I’ve decided on a retirement investment allocation that fits me best: 75% in stocks, 15% in real estate, and 10% in bonds.
Step 2: Determine the type and percentage of investments to add to the Roth IRA. Now that I know what percentage of my retirement portfolio I want to allocate to each category, my next step is to determine which investments and how much of each investment I need to add to my Roth. Because I already have some of my investments in my main job’s retirement plan, I now need to add the remaining investments to my Roth IRA. When adding the remaining investments to my Roth IRA, I must make sure that the total value of all of my retirement investments remains at my desired allocation of 75% stocks, 15% real estate, and 10% bonds.
In my main job’s retirement account, I am invested in a target retirement index fund that invests my money in 90% stocks and 10% bonds. This means I need to add real estate index funds to my Roth IRA and also invest in some stocks and bonds in my Roth IRA to maintain my desired investment percentage. (Side note, although I plan to invest in actual real estate through the purchase of apartment buildings and multifamily homes, I like my retirement real estate investments to be in REITs aka Real Estate Investment Trusts - which are like giant real estate index funds that invest in many different properties). Also, keep in mind that since Roth IRA investments are made with money you already paid taxes on and never have to pay taxes on again, it’s often wise to make sure that you use this Roth account to make investments in things that pay dividends so you can avoid paying taxes on the money you make from those investments.
Step 3: Have the money automatically withdrawn from your account each month. Once I know how much of each investment I want to have in my Roth IRA, I just need to make sure I actually place the money into my Roth account. Although some people like to contribute the max allotment of $6,000 per year at one time to get their money invested sooner rather than later, I invest it in small pieces each month. Doing it in small pieces instead of all at once has two benefits for me.
First, it gives me more flexibility so that I can decrease the allotment one month and make up for it the next month if I need to. Secondly, contributing periodically each month gives me a greater chance of buying stocks at a “discount.” (The prices of stocks and index funds fluctuates. If I buy all of them at one time with by investing one large sum of money in my Roth IRA at once, then I buy all the stocks (or index funds) at the same price. However, if I invest a little each month then I increase my chances of buying stocks (or index funds) when they may be a lower price. Although there is also a chance I could buy the stocks (or index funds) at a higher price, doing it a little bit at a time has been shown to save people more money overall. This is known as “dollar cost averaging”. Each person is different, but I prefer to have the money automatically withdrawn from my account each month and invested into my Roth IRA. (When my salary increases, I’ll likely have the $6,000 taken out over 3 months instead of over the entire year)
Step 4: Adjust the investment percentages periodically. The prices of stocks, bonds, and REITs can fluctuate. Sometimes the prices change by only a small amount and thus stay at around the same price. Other times the prices of the investments can change by a lot and remain at this new level for a few months or even years. For example, when the coronavirus pandemic hit, the price of many stocks decreased and stayed low for a couple months before they started to come back up. When these fluctuations occur, they can change the balance of my retirement investments.
If stocks (or index funds) decrease then that means the value of the stocks in my portfolio have decreased, which means that instead of having 75% of my money in stocks this percentage may decrease to around 70%. In order to get back to my target of 75% I will need to buy even more stocks in the future (increase the percentage of new money I have going towards stocks) to make up this difference. Although different people have different preferences for how often they plan to adjust their investments, I plan to do it once a year.
Tell me, do you have a Roth IRA? If so, how are you investing it?
How to Invest Money from your Side Gig
There are many different ideas for a side gig and several different options for what we can do with money from our side gig, but what about investing it? There are 4 ways I’ve considered investing the money from my side gig and each have their own pros and cons. They are:
1) Put the money into a Roth IRA. This allows me to invest in index mutual funds in a way that’s tax free and will gain interest overtime. When I take the money out in retirement, I can do so tax-free. Plus, if I happen to need this money before that to put a down payment down on a home, pay off some of student loans, invest in real estate, or pay some unexpected medical expenses I can do so without any penalties.
2) Increase the money I contribute to my job’s 401K. Technically you can’t put your side income into a work 401K but you could open up a solo 401K or increase the percentage of money you contribute to your work 401K up to the $19,000 yearly limit. The benefit of this is that you are still investing toward retirement in a way that’s tax efficient and you don’t have to worry about managing another retirement account with different investments. Plus, if you have federal student loans like I do and are on an income-driven repayment plan going for public service loan forgiveness, increasing the percentage you contribute toward your 401K actually lowers your monthly student loan payments which may leave even more money in your pocket each month.
3) Open a taxable “brokerage” account. If you have already contributed the max amount to your retirement account or Roth account but still want to invest in stocks and index funds, open up a brokerage account. This will allow you to invest in the stock market in a way that will gain you interest over time but isn’t tied to your retirement. This means if you happen to need the money for home renovations, better car, or a lavish vacation you can have your broker sell some of your stocks and get the money you need when you need it. Opening up a taxable “brokerage account” isn’t the most tax-efficient account since you will pay taxes on the profits you make but it gives you easier access to your money when you need it.
4) Invest in real estate. One of the main ways many American’s build wealth is through Real estate. Not only can it help you get higher returns on your investments which increase your profits, but it also allows you to do so in a way that’s tax-efficient and even tax-free. If you already have a decent chunk of money in your work retirement plans invested in index mutual funds perhaps you may want to diversify your invests a little and get started in real estate. You could start buying rental properties to increase your monthly cash flow and become an active investor who can write off taxes from your day job, you could start investing in crowdfunding deals or real estate syndications with other investors who focus on making money from apartment deals as a more passive investor, or you could simply start buying smaller properties and renting them out over time, or even just invest in some Real Estate Investment Trusts (REITS) which are like index mutual funds for real estate deals. There are many options available.
My point? The correct option may differ for each person. If you are young, haven’t maxed out your retirement accounts, and don’t need the extra cash on hand, perhaps putting the money into a Roth IRA or extra money in your job’s 401K may be the best option. If you’ve already maxed out your retirement accounts or think you might need this money before you turn 55, then perhaps opening up a brokerage account may be the best move. Although you pay a little more in taxes it may provide the flexibility you need to take the money out if an emergency arises. If you already have a good chunk invested in the stock market perhaps you should consider other investment vehicles like real estate. Contrary to popular belief, you don’t have to be rich to invest in real estate and there are many different options that may suit your lifestyle and risk tolerance best. Right now, I’m putting extra money into retirement accounts, but I plan to invest a lot more into real estate once I finish my residency training. Look into the different types of investment options and choose the one that may be best for you, keeping in mind that it may vary based on your life circumstances and net worth.