This step is really important and most people just don’t get it. Listen carefully — you have to deferred, avoid, and reduce capital gains taxes to the bare minimum! Well, how do I do that you ask? The best thing to do of course is to completely avoid capital gains taxes. The only way to do that is to open a Roth IRA. The reason you avoid capital gains taxes is that you pay your income taxes first and then you never pay taxes on any profits of the money you put into your Roth IRA.
If you make a lot of money though, you can’t open a Roth. In that case you need to open a Standard IRA and of course if your company matches in a 401(k) you need contribute up to the matching. In a 401(k) make sure that you only buy a no-load indexed mutual fund. Get your accounts open! Get your accounts open! Get your accounts open! I can’t overemphasize or shout this loud enough. Once you have your account open you will be motivated to start investing — if you don’t know how to trade through such an account I can teach you.
Here is a key point if you trade in an individual trading account where you are subject to capital gains taxes. You have to remember that the short term capital gains tax is double the long term capital gains tax rate. That means that if you buy a stock now and then sell it in less than a year you will have to pay your regular income tax rate which is as high as 35%. On the other hand if you buy low and hold for the big multi year stock price raises your capital gains tax rate is only 15%. This is huge! Look, that means that you have to earn 20% just to overcome the hurdle when you buy and sell real fast like the get rich quick gurus want to teach you.
Get your accounts open. Here is a recap. First check to see if the company you work for offers a 401(k) plan with matching and contribute up to the matching. If you work for a university than open a 403(b) plan which can be even better than the 401(k). Restrict your investing in a 401(k) or 403(b) to no load indexed mutual funds. Second, if you can save more than the matching amount your employer offers then open a Roth IRA and contribute up to the maximum. Third, if you are a really hard core saver and investor like my wife and me open an individual trading account. Fourth, open your Roth and individual trading account at an online brokerage like Ameritrade.com or Etrade.com. This insures that you won’t get an earful of manure from a stock broker who just wants to nickel and dime you out of your account. Also by trading online yourself you will learn to become a self sufficient investor — the richest kind of all!