If you find a company you want to invest in, you shouldn’t invest a huge chunk of your portfolio at once. Instead, choose one company and invest a fixed percentage of your portfolio each time you see it going public, you can even start with fractional shares. Investing the full amount in any one company can be too risky. That said, you can always buy stocks you like at a lower price before the company goes public, and invest a small part of your portfolio at that price.
While you could buy your investments in a 401(k) plan, the tax advantaged Roth IRA gives you the best choice if you don’t have enough money to invest. For example, you could have $5,000 in your Roth IRA. In order to receive tax benefits, the $5,000 must be put in the Roth IRA in taxable accounts, but only after January 1, 2009. For more on the differences between your 401(k) and Roth IRA, see Why should I choose a Roth IRA instead of a 401(k)?
If you make more than the current minimum wage ($7.25/hr), and are in one of the highest-income income groups, you can contribute up to $5,500 more to your 401(k) than to your Roth IRA. If you make more than the current minimum wage ($9/hr), and are in one of the lowest-income income groups, you can contribute up to $1,000 more to your 401(k) than to your Roth IRA.
Roth IRA vs. Traditional IRA Roth IRAs pay out at a fixed rate (7.5% after-tax), whereas traditional IRAs pay out in a compound interest rate (6.8% at age 70 1/2). Roth IRAs also don’t pay taxes on their earnings until withdrawn (if your retirement date falls within the 6-month withdrawal limit). Roth IRA Distributions Traditional IRAs pay a tax penalty on distributions once they exceed the $5,500 withdrawal limit per year. These penalties are imposed on a per-year basis. You must notify your employer that you want a Roth IRA distribution by February 1 of each year. Then, your traditional IRA is considered to be in default and subject to income tax withholding until the next regular income tax filing deadline. If the payment is due by June 30, it is due as a tax-free withdrawal, which can be accomplished as a tax-deductible tax-deferred distribution. This is not a taxable distribution. However, the IRS has stated that the tax-free withdrawal will not be considered a taxable distribution for federal income tax purposes and the tax will not be taken off the individual’s income.
As an example, if you had an account balance of $10,000 at the end of the tax year, you can withdraw $3,000 for a tax-free withdrawal. The remainder of the amount can be withdrawn in any amount up to the amount of $10,000 plus $200. This will be considered a taxable distribution.