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A new set of $1,400 stimulus checks may attract grantees who really don’t need money to venture into the stock market.
Some experts say that depending on your goals, a brokerage account may not be your best choice.
Congress and President Biden passed the US Rescue Plan Act last month and approved the third round of direct payments.
Pay up to $1
Like the first two direct checks, this money is designed for individuals and families who meet certain income and other requirements.
As with past payments, this money is not necessarily targeted. Therefore, the funds will go to those who have been hit by the pandemic and those whose income has not been interrupted.
More information from personal finance:
A $1,400 stimulus check for approximately $127 million has been sent
Using tax-deferred savings can help you get a $1,400 stimulus check
How to make sure you don’t miss the $1,400 incentive check in the email
For the people in the latter camp, trying to make money grow is tempting.
A recent survey by Deutsche Bank found that many young retail investors who already use online brokerage platforms plan to use some of their funds to buy stocks.
The survey found that how much money these investors plan to allocate to the market depends on age.
People between 25 and 34 years old plan to spend 50% of their stimulus checks on stocks. For young people aged 18 to 24, this proportion drops to 40%, while for investors aged 35 to 54 it drops to 37%.
The desire for investment has prompted experts to try to guide investors to use the money to make wise decisions.
CNBC’s Jim Cramer suggests that after people pay their bills, they should put most of their money into S&P 500 index funds. Investors should invest at least $10,000 in one of these low-cost funds before they can take a position in a single stock.
Josh Brown, CEO of Rithholtz Wealth Management (also a CNBC contributor) recently wrote a blog post urging people to stay away from speculative investments.
Brown wrote: “Don’t buy SPACs, digital currencies, or irreplaceable tokens that millionaires and billionaires sell to you with stimulating checks.”
The features provided by financial stimulus startups attract some recipients of incentive checks to make withdrawals more convenient. For example, a feature of Robinhood provides traders with a bonus for new deposits.
However, while many recommendations focus on how to invest in stimulus checks, less attention is focused on where to invest them.
CPA, Ed Slott & Co founder Ed Slott said: “Where to put it and how to invest are two different aspects.”
Slott said that when deciding where to store money, people may want to consider using a traditional or Roth individual retirement account instead of a brokerage account.
A key question to ask is how long the money in the account will last.
If this is a short-term investment (the investor plans to invest back and forth), it is best to keep it in a brokerage account so that it can be withdrawn without any penalty.
But it is important to keep in mind the tax implications of this money, which is where the IRA may be more advantageous, Slott said.
If you hold stocks for more than one year, the long-term capital gains rate applies. But any time frame shorter than this will be taxed at the normal tax rate.
Slott said: “The advantage of the Irish Republican Army is that it is more suitable for long-term development.”
Slott believes that the Roth IRA, which invests in after-tax funds, may provide the greatest upside potential in this situation.
With Roth, there is no need to report transactions made within the account, so as long as certain conditions are met, funds can be withdrawn tax-free. (For example, it usually takes five years from the date of the Roth IRA payment to withdraw any income. If you are under 59.5 years of age, you may be subject to certain penalties.)
With a traditional IRA, any transactions within the IRA will not be tracked, but the account owner must pay taxes on the money when withdrawing money.
Ideally, investors will leave their funds in place to allow them to grow.
Slott said: “If you can stick to it for a long time, you will gain a lot over time.”