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By Jason Stipp | 09-20-2011 06:27 PM

Where to Send Your First Investment Check

Know what you're investing for, how often, how much, and which vehicles you like before picking a platform, says Morningstar's director of personal finance.

Jason Stipp: I'm Jason Stipp for Morningstar.

Many would-be investors know they need to get going on their portfolios, but they might not know where to start. Here with me to offer some insights on where to send that first investment check is Morningstar's Christine Benz, director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: So, I think a lot of investors are familiar, or a lot of would-be investors are familiar with investing through their 401(k) plans at work. This is where they usually start investing. We're going to be talking a little bit about investing beyond that, but before we even get to that, how do I know if I even need to invest beyond that 401(k) plan?

Benz: Well, I think you want to do some basic homework on your plan, how good it is, how good the investment options are, and if it's not measuring up from that standpoint, you certainly would want to think about going outside the plan once you've invested enough to earn any matching dollars that you're getting.

But another thing to think about when investing outside of a 401(k) plan is that diversification of tax treatment that you can get by going with some sort of Roth vehicle. Now, your 401(k) plan may offer a Roth feature as well, so it will allow you to take tax-free withdrawals in retirement, but your money gets taxed on the way in, but it may not. A lot of 401(k) plans don't offer that Roth feature. So, that might be one very good reason to consider going outside of a 401(k), to be able to take advantage of Roth IRA contributions.

Stipp: Also, 401(k)s have contribution limits as well. So, if you're bumping up against those, you would likely to be looking outside [the 401(k)] for additional funds, but what about for time horizon? So, 401(k)s are for retirement, but we all know that we're saving for lots of things before retirement.

Benz: Right. So, I think that's an essential first step to think about when deciding to invest outside of a 401(k). Think about, what am I doing with this money. So, if it's money that you expect to tap within the next couple of years or next five years or so, you need to keep that money relatively safe. Certainly, if it's money that you expect to deploy within the next couple of years, you probably want to just keep it in cash or a money market vehicle,. Yields are terrible right now, but I think you have to settle for that steady return versus one that is higher but potentially a lot more volatile.

Stipp: And it's also liquid and accessible if it's outside the 401(k). You might not be earning a lot on it, but the value won't fluctuate, and you won't be paying any penalties when you draw that money.

Benz: Or taxes, right.

Stipp: Okay. So, what about the types of investments? So, we know that there are lots of different options among mutual funds and ETFs. You should be thinking about that as well before you decide where to send the check, obviously.

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