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Investing Basics: How To Buy ETFs

China iTech Ghana
Wednesday, September 29, 2021 | views Last Updated 2021-09-29T21:27:06Z
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Exchange traded funds, commonly known as ETFs, are a low-cost way to buy exposure to hundreds or thousands of stocks and bonds, making them a favorite of financial advisors and investors alike. Here’s how to start buying ETFs.


1. Open a Brokerage Account

Because you can’t just go to the store to purchase a basket of ETFs, the first thing you need to do is open a brokerage account. Before deciding where to open your account, though, it’s important to consider your goals. Certain types of accounts are better for certain goals.


The main types of brokerage accounts are:


Taxable: These are “regular” accounts that don’t come with special tax advantages. This makes them ideal for goals happening before you reach 59 ½, the federal retirement age. You don’t have restrictions or penalties when you sell your investments, but you do need to be aware of taxes. You’ll owe them anytime you sell investments for a gain or even when you receive dividend payments.


Retirement: Tax-advantaged retirement accounts like traditional IRAs and Roth IRAs allow your investments to grow tax deferred—or even tax free, in the case of Roth IRAs. This makes them powerful tools for saving for retirement. 


However, because of these tax benefits, the IRS imposes special contribution limitations and withdrawal requirements for IRAs. You cannot contribute more than $6,000 per year ($7,000 if you’re 50 or older), and you cannot access funds in your IRA until you’re 59 ½ without paying a 10% penalty—plus taxes on any money that’s never been taxed before.


529: If you’re planning to use ETFs to save for college, a 529 account is a good place to start: Money held in a 529 grows tax free and won’t be taxed on withdrawal as long as it’s used for qualified educational expenses. 


529s can even now be used for pre-college educational costs, like private school tuition, as well as trade school fees. While you cannot withdraw funds for non-education expenses without incurring a penalty, funds held in 529 accounts can be transferred to another relative penalty free.


Custodial: If you want a less limited way to save on behalf of a child, you’ll want to check out custodial brokerage accounts. These investment accounts let you invest and manage money on behalf of a child beneficiary. 


There are no tax benefits for custodial accounts, besides up to about $2,000 of investment income being taxed at the child’s lower rate, but funds can be used much more broadly than 529s. Money in a 529 can go to any expense that benefits the child. Note, however, that once the minor comes of age (usually 18 to 25, depending on the state you live in), they will have full control of the account.

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  • Investing Basics: How To Buy ETFs

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