401K, Roth, taxable brokerage, HSA, UTMA, 529…..Have I lost you yet?! How many accounts are there?

There is so much financial jargon and acronyms in the finance world it is completely mind numbing…even for me…and I love this stuff.

I have spent the last 15 years of my life getting an understanding of all things personal finance, investing, tax and accounting. So now, 15 years later, I can’t remember a time I didn’t know or understand all of these concepts. They are now engrained in my mind, for my own benefit and also the benefit of the clients I’ve had the pleasure of advising over the years.

But I get it, it’s a lot of information. There are a lot of acronyms and a few too many rules. But don’t make the mistake of thinking just because there is a lot of it and it’s new to you, that is is difficult and unattainable for you to wrap your head around. Because that’s just simply not the case.

Maybe This is the Mom in Me Talking

But we all were beginners at one point in our lives for every single thing that we now do with ease. Think about that. Learning how to walk, learning how to read, how to communicate, how to use a computer, how to drive a car, how to excel in your career, how to post a TikTok video.

Whatever it is, you once upon a time, had never done it before. But you learned the skill or consistently participated in an activity enough to make yourself confident in it.

I am not suggesting that you go become a financial expert. Not at all. In fact, to be an investor, you don’t need any financial background whatsoever. But what I do wish for you is that you familiarize yourself with your options enough that you feel confident in the financial decisions you are making.

Different Investment Account Options

So with that said, I wanted to provide a list of each of the investment account options available to you. These are accounts that allow you to buy and sell securities (stocks, bonds, etc.) within them. A bank account and a brokerage account are two different things.

A bank account or checking and savings account will hold cash. These accounts are not able to hold securities.

A brokerage account will hold a mixture of cash and securities.

So let’s go through all of the different types of accounts you are able to invest in. Some will apply to you, and some will not. I will provide a general understanding of each. There have been blog posts or there will be, pertaining to each of these individual items so that you can get a detailed understanding.

Retirement Accounts

A retirement account will have a tax advantaged element to it with the purpose of incentivizing people to contribute to their future retirement. Tax advantaged meaning either….

Pre-Tax or Traditional: Your contributions into the account have not been taxed yet. Your contributions and income in the account will grow tax deferred to be taxed upon your withdrawal in retirement.

After-Tax or Roth: Your contributions have already been taxed prior to contributing them into the retirement account. So, your contributions and income in the account will continue to grow tax free and be withdrawn tax free assuming you follow the Roth guidelines. Refer to my Roth IRA Blog post.

1. Employer Provided Retirement Accounts (For Employees)

1. 401K Plan
   • Most common retirement plan account. Designed for Corporations and For-Profit Organizations
     
     
2. 403b Plan
   • Designed for Non-Profit Organizations like public schools, hospitals, etc.
     
     
3. 457 Plan
   • Designed for State and Local Government Employees
     
     
     

All of these accounts are set up for you as the employee to be able to contribute towards your retirement. Your employer will often have a corresponding match available to you.

An example of this would be… your employer will match 100% of your retirement contributions up to 3% of your salary. So if you are making $100,000 and are contributing 3% to your employer plan, you can expect to receive roughly $3,000 in your retirement account from the employer match – free money! Your goal should be to contribute up to the employer match, at a minimum.

2. Self-Employed Retirement Accounts (For Entrepreneurs)

The below retirement accounts are specifically designed to support the self-employed and small business owner.

1. SEP IRA
   • Meant for small business owners with no to few employees
   • No reporting required
   • Contributions to retirement account may be used to offset your business income
   • Only a Pre-tax/Traditional option for SEP IRAs
     
     
2. Solo 401K
   • Best for those who do not have employees
   • There is an element of administration and reporting for this type of retirement plan
   • There is both a Roth and Traditional option for Solo 401Ks
     
     
3. SIMPLE Plan
   • Meant for a larger businesses of up to 100 people
     
     

Each of these options have there own sets of advantages and disadvantages for the self-employed. Details for each coming in a blog post soon!

3. Individual Retirement Accounts (IRAs) – (For everyone)

Individual retirement accounts (IRAs) are designed for individuals who may or may not have access to an employer provided retirement plan but want an opportunity to contribute to their retirement. These are accounts that are available to anyone and everyone so long as you meet a few requirements.

In order to contribute to an IRA, you must have earned income. This is income through wages, employment or compensation of some kind.

Maximum contributions in 2021 are $6,000, or $7,000 if age 50 or older.

1. Traditional IRA
   • No income limitations, anyone can contribute so long as you have earned income
   • Growth in the account will grow tax deferred – meaning it will not be taxed until you withdraw the funds in retirement
     
     
2. Roth IRA
   • Income limitations. Refer to the Roth IRA blog post to review
   • After-tax contributions
   • Growth in account grows tax free and withdrawals are tax free in retirement
     
     
     

Investment Accounts With A Specified Purpose

These investment accounts are tax advantaged and are designed for the funds to be used for a specific purpose. In order to maintain the tax advantaged status, the funds will need to be used for the specified purpose. If they are not, you may be subject to a 10% penalty.

1. 529 College Savings Plan
   • The funds are contributed after tax but will grow and be withdrawn tax FREE so long as the funds are used for qualified education expenses. Refer to my blog post specifically on 529 College Savings Plans.
     
     
     
2. Health Savings Account
   • The funds are contributed pre-tax and will grow and be withdrawn tax FREE so long as the funds are used for qualified medical expenses. Refer to my blog post specifically on Health Savings Accounts.
     
     
     

Investment Accounts For Children

1. Custodial Roth IRA
2. UTMA
3. 529 College Savings Plan
   
   
   Refer to my blog post that lays out each of these accounts in detail here.
   
   
   

Individual Brokerage Account (For everyone)

Last but certainly not least, you have the taxable brokerage account option.

This account is exactly as it sounds. It’s taxable. So all of the income earned and realized throughout the year will be taxable to you in that tax year. This account will provide you with the most flexibility in that there are no maximum contributions or rules telling you that you can’t take the funds out until retirement.

You can open an account in your individual name or joint with your spouse. You can contribute as much or as little as you’d like and you are able to contribute and withdraw funds at your convenience.

The taxable brokerage account is a fantastic option once you have maxed out your tax advantaged accounts OR if you are already sitting on a significant amount of cash and have already maxed out your IRA option.

Hope this was a helpful summary for you to be able to categorize each of the investment account options.

Cheers!

Tune in to more blog posts every Tuesday and Thursday!

Follow @finpoweredfemale for personal finance, tax, investing and business ownership tips on building wealth with confidence!

Additional Blog Posts that I have written that may help you navigate through some of these investment account options:

1. How To Make the Most Out of Your Health Savings Account
2. All About Roth IRAs and Why I Love Them
3. The Grand Debate: The Roth 401K or Traditional 401K
4. Top 3 Ways to Save For Your Child’s Future
5. What You Need To Know About 529 College Savings Plans