With $10,000 to invest, use accounts with tax breaks before a regular one. Take any 401(k) match you’re missing, pay off high-interest debt, and top up your emergency fund. Then fill this year’s Roth IRA, and put the rest in a broad, low-cost index fund in a brokerage account.
The account you choose matters more than the fund you buy.
Accounts with tax breaks have yearly limits you can’t make up later, while a brokerage account takes any amount, any time. Work down this list until the money runs out.
- Take your full 401(k) match first, since a 50% match is an instant 50% return. A 401(k) takes money only from paychecks, so raise your contribution and let the $10,000 cover the smaller ones.
- Pay off high-interest debt such as credit cards. Clearing a card that charges 22% is a guaranteed 22% return.
- Top up your emergency fund, so a surprise bill never forces you to sell investments when prices are down.
- Fill this year’s Roth IRA. Money goes in after tax and comes out tax-free in retirement. You can’t put in more than you earned this year, and at higher incomes the limit shrinks, down to zero.
- Fund a health savings account (HSA) too if you have a high-deductible health plan. Contributions are deductible, and withdrawals for eligible medical bills are tax-free.
- Put the rest in a broad index fund in a regular brokerage account, or raise your 401(k) further the same way if you won’t need it before retirement.
Say you get the match, owe nothing on cards, and have a full emergency fund. If you’re under 50, this year’s limit, $7,500, goes in the Roth and the rest in a total-market index fund.
Invest it all at once, since Vanguard’s research found a lump sum beat splitting it into three monthly purchases about two-thirds of the time from 1976 to 2022. If a drop right after would rattle you, dollar-cost averaging, spreading it over a few months, is fine too.
Skip hot stocks, and don’t pay an advisor 1% a year to manage it. At an assumed 7% yearly return, that fee leaves you 6%, so $10,000 grows to about $57,400 in 30 years instead of $76,100.
Buy the index fund the day each deposit arrives, since the money sits in cash until you choose an investment.
Pick a brokerage for your Roth from the best places to open an IRA.
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