What’s the difference between active and passive investing? What is direct indexing? How much should I contribute to my 401(k)? What is a SDIRA? What are municipal bonds? How should I approach my strategy if I work at a fast-growing company? Use these resources to get answers to those investing questions and many others.
There’s a tax-advantaged investment account called a “529 Plan” that lets you save money for your children’s (or another beneficiary’s) education. You contribute post-tax dollars into a 529 Plan and as long as the money stays in the account, the accrued earnings are not taxed. Some states also offer tax breaks for contributions. When choosing a provider, it is important to review the fees and investment options that each offers. 529 Plans are flexible in that you can change the beneficiary and multiple people can contribute to the account. If you do want to withdraw the money for non-educational purposes, there is a penalty and the proceeds are taxed.
The idea of passive index investing is that rather than trying to pick a few companies that you think will do particularly well, you try to invest a little bit into every company in the market. How broadly or narrowly you define “every company” will vary, but the idea remains the same: invest a little into every company so you get market exposure and diversification.
Active investing is investing based on an independent assessment of each investment’s worth—essentially, trying to choose the most attractive investments. This commonly means investing in funds whose portfolio managers are selecting investments, but you can also do it yourself, picking stocks you think will do well. Generally, the goal of active managers is to “beat the market,” or outperform certain standard benchmarks. For example, an active investor’s goal may be to achieve better returns than the S&P 500.
Planning for retirement often feels pointless. You’re young and your startup is taking off — why should you worry about retirement now? There are two concepts that make this planning a no-brainer: compounding and tax-advantaged accounts.
Municipal bonds (muni bonds) offer a very reliable and stable income source to investors. Many startup employees consider investing in muni bonds as a source of basic income for themselves that’s diversified from their companies. Further, because income from municipal bonds is generally exempt from federal income tax, startup workers in states with high levels of income tax (like California, New York, and New Jersey) can especially benefit from the tax-free income that municipal bonds provide.
There’s an investment vehicle called an “exchange fund” that can help startup employees and founders diversify post-IPO without triggering taxes, though there are significant downsides to consider. An exchange fund might make sense for you if you are highly concentrated in one public company’s stock or have highly appreciated stock that would be subject to large capital gains taxes if you sold your shares. The fund pools your shares with other concentrated shareholders, to try and match the allocation of an index. You usually must be a qualified purchaser to use an exchange fund, and most funds have investment minimums (~$500k). Since there is a significant lockup period (~7 years), you should only pursue this option if you are you do not have liquidity needs in the short-to-mid term future.
US-based angel investors may explore setting up an LLC to house their angel investments. The main benefits are organizing investments across multiple people, preserving privacy, building an investing brand, managing business-related expenses, and maintaining flexibility to transfer ownership. Generally, investing through an LLC rather than as an individual offers no tax advantages.
As a startup employee, you likely have extra insights into emerging areas of the economy and even the opportunity to invest in them. Unfortunately, most IRA custodians won’t allow you to invest in these opportunities with your tax-advantaged IRA account. However, by setting up what is known as a “self-directed IRA,” you can use your IRA money to make alternative investments.
Planning for retirement often feels pointless. You’re young and your startup is taking off — why should you worry about retirement now?