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:
- 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.