Investment Accounts

The five types of investing accounts you need to know From 401(k)s to 529s, investment accounts vary in purpose. Learn which are better suited for your long-term financial goals. Investment accounts are valuable tools for reaching your financial goals. But they’re not all the same. You have choices to make, but we’re here to help. Why it matters: Choosing the right investment accounts could mean reaching your goals ahead of schedule. Conversely choosing the wrong accounts could mean you don’t have the money when you need it. Know your goal: Whether you’re simply trying to build wealth or you have a specific goal in mind, knowing what you want to do will guide what account type you choose. Three of the most common goals are: Saving for your retirement Saving for a major purchase such as a house Saving for your own or a loved one’s education The big five: Once you know your investing goal, one of these five types of accounts should likely do the trick: IRAs 401(k)s Health Savings Accounts (HSAs) Individual (or Joint) Brokerage Accounts 529 plans Saving for retirement? Look at these tax-advantaged accounts: IRAs are used to save for retirement, offering unique tax advantages. Unlike a 401(k), your contributions don’t automatically come from your paycheck and the annual contribution limits are lower, about three times lower in fact. An IRA can be an excellent choice. They also may be subject to penalties for early withdrawals. 401(k)s are retirement accounts offered by employers, providing tax advantages similar to an IRA. Contributions are automatically deducted from your paycheck and sometimes employers match a percentage as an added benefit. Keep in mind, you’ll usually incur penalties for early withdrawals. HSAs are designed primarily to help individuals pay for health care costs but once you turn 65, you can use them for anything you want without incurring penalties. Plus, you enjoy triple the tax advantages. Things to know about retirement investing accounts: There are limits: Retirement accounts have different contribution limits (the amount you can deposit each year) based on account type. If you’re looking to save an uncapped amount each year, a brokerage account can be used after maxing out retirement accounts. Did someone say tax-advantaged? The tax advantages of 401(k)s and IRAs come in two flavors: Roth and Traditional. A Roth account may be better if you think you’ll be in a higher tax bracket when you retire. But if you expect to be in a lower tax bracket when you retire, a Traditional retirement account may be better. (Exciting Disclaimer: Always consult a licensed tax advisor.) Did someone say triple-tax-advantaged? With HSAs, contributions, potential earnings, and withdrawals (with a few key stipulations) are tax-free. This is what we mean when we say HSAs enjoy “triple” the tax advantages. The more you know: You can have a 401(k), a Traditional IRA, a Roth IRA, and an HSA at the same, so you can contribute as much as possible toward retirement through tax-advantaged means. Saving for a major purchase? Check out this account: Individual (or Joint) Brokerage Accounts let you purchase stocks, bonds, exchange-traded funds (ETFs), mutual funds, and other financial assets. A joint account is commonly used by married couples to consolidate their investments. Brokerage accounts lack tax advantages but are available to virtually anyone to invest any amount. Saving for education? Then try this account: 529 plans are an ideal choice because earnings are tax-free, as long as you use them for qualified education costs. You can withdraw from the plan as needed for education-related expenses. Hot Tip: Stash your cash until you’re ready. Choosing the right investing account can take some thought. While you're deciding, a high-yield Cash Reserve account can help you earn more from your cash until you’re ready to invest.

Should you have an IRA even if you have a 401(k)? A 401(k) is a great place to start saving for retirement especially if your employer offers matching contributions. But an IRA can take you a step further as you plan for the future. The main idea: If you have a 401(k), consider an IRA as well. You may find that an IRA can provide additional investment choices and potentially lower fees than your 401(k) plan. Plus, having both gives you tax diversification in retirement. Know the essentials: Your 401(k) is most often offered as a benefit from your employer although if you’re self-employed you can have an individual 401(k). It’s common for employers to match your 401(k) contributions up to a percentage of your paycheck. An IRA is an account you open yourself. At Betterment, we can help you open an IRA that meets your goals with our guided process. There are two types of IRAs: Traditional and Roth. You contribute to a Traditional IRA using pre-tax income while a Roth IRA allows for contributions from post-tax income. The big benefits: An IRA in addition to your 401(k) offers 3 potential benefits: Additional investment choice: While Betterment offers the same diverse investment choices in our IRA accounts and 401(k) plans, IRAs typically have more investment options to choose from than an employer-sponsored 401(k). This can help diversify your portfolio using low-cost investments such as ETFs. Access to lower-fee investments: The fees for 401(k) investments are dictated by your employer’s plan. Since you can open an IRA on your own and invest in a range of assets, you have a larger selection of low-fee options available to you. Compare your 401(k) plan fees to IRAs to see if adding an IRA may be right for you. If you have questions about 401(k) fees, ask your HR or benefits contact at your employer. Tax diversification in retirement: Having a 401(k) and an IRA can provide tax diversification in retirement. You can contribute pre-tax dollars to your 401(k) and traditional IRA, paying tax on future withdrawals in retirement. Roth IRAs and Roth 401(k)s on the other hand allow you to contribute post-tax dollars—for example, money from your paycheck that you already paid taxes on. Your withdrawals, both on the earnings and the contributions, when you reach retirement age can be withdrawn tax-free. Bonus benefit: Having a 401(k) and an IRA allows you to put more away for retirement in tax-friendly accounts. In 2023, you can contribute up to $22,500 to a 401(k) with catch-up contributions up to an additional $7,500 if you’re 50 or older. For IRAs, you can contribute $6,500 ($7,500 if you're 50 or older), depending on your income level. Pro tips: Make sure you know how much your employer matches your 401(k) contributions. Contributions from your employer are essentially free money for your retirement savings. If you are considering an IRA in addition to your 401(k), look at all fees, including management fees and expense ratios, when selecting investments.

Should You Create a Trust Fund? It Could Help You Preserve Wealth Weigh the costs and benefits of establishing a trust as part of your estate planning. For those who have assets to leave as a legacy, a trust can be a strategic part of estate planning. Trust assets can include everything from a life insurance settlement and real estate to investments and cash. However, not all trusts are the same—there are many variations, each with specific benefits and restraints. In the past, establishing a trust was largely viewed as a tool for very high net worth individuals looking to preserve wealth across generations. But these days, easily accessible low-cost investing accounts help us all take advantage of the value that creating a trust can provide for our assets. One of the benefits of trusts is that they can shield assets from lawsuits and probate costs. Many are interested in these benefits regardless of their net worth. With the emergence of automated investing services, like Betterment, setting up and managing a trust account of any size is easier than ever. Selecting the right type of trust for your needs will be something to discuss with an estate planning specialist, such as a financial advisor, accountant, or estate planning attorney.1 However, there are some general benefits that most trusts offer. Below is a summary to help you decide whether a trust may be right for you. Privacy and Protection After an individual’s death, an estate typically goes through probate, where the will is open for public scrutiny and assets may be used to pay off creditors. If assets are held in multiple states (real estate, for example), probate will take place in every state—adding substantial costs to settling an estate. The costs associated with probate could reduce the estate by 3% to 7% on average—and that’s not including additional estate taxes and income taxes that may be due. These additional costs mean significantly less assets are given to the intended beneficiaries. With certain types of trusts, all assets that have been placed in the trust are considered property of that trust, and thus they are off limits to creditors, they’re kept out of public record, and they can avoid probate. Trusts are also a useful way to shield and protect assets for people who are at higher risk of litigation, such as doctors. Placing assets in a trust may also reduce the potential for lawsuits between heirs. Taxes Different types of trusts provide different tax advantages. For example, an irrevocable life insurance trust shelters any life insurance death benefit proceeds from estate taxes. The most popular type of trust is a revocable living trust, which is a trust that can be modified once it is established. It’s created during the grantor’s (the person who funds the trust) lifetime. On its own, a revocable living trust doesn’t provide specific tax benefits, but additional provisions can be added to these trusts to help reduce estate taxes. There are about nine commonly used trust types. Speaking with an estate planner and tax advisor will help you determine how to maximize tax advantages and establish the right type of trust for your needs. Distribution Control Not all beneficiaries need the same thing. A trust can establish guidelines for how and when funds are distributed. Rather than simply naming the person who will inherit your assets, you can add provisions that specify how the trust assets can be used. By adding these provisions to your trust, you can help your assets last longer, since you decrease the risk of a beneficiary draining the account for frivolous expenses. For example, funds might be earmarked for education, for special medical needs, or for distribution only after the beneficiary has reached a certain age. In addition, a trust can ensure—through its guidelines—that money is distributed in a specific way to a specific entity, rather than an individual. This might mean a charity, a religious institution, or your alma mater. Sound Investment Strategy A trustee is the person(s) named in a trust document who is responsible for making decisions regarding the trust. By law, a trustee has a fiduciary responsibility to oversee the funds entrusted to them. Regulation, such as the Uniform Prudent Investor Act, states that a trustee must act “prudently” when administering a trust, which means holding the investments in a sound interest-bearing account, as well as assessing the risk, return, and diversification of assets. Trustees can be an investment firm or an individual. Trustees should ensure trust assets are invested wisely to fulfil the specific aims of the trust. Automated investment services like Betterment provide trustees with an easy, low-cost way to manage a trust. Consider the Benefits Whether you are looking for asset protection, privacy, tax minimization, control over how your beneficiaries use their inheritance, or a combination of each of these things—establishing and managing a trust has never been easier. After speaking with your estate planning specialist and determining which type of trust is best for you, check out our FAQ on what we offer for trust accounts here at Betterment. 1Note that Betterment is not a tax advisor and nothing in this blog post should be construed as specific advice—please consult a tax advisor regarding your specific circumstances.