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.
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.
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.
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.
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.
The below retirement accounts are specifically designed to support the self-employed and small business owner.
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!
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.
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.
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.
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Additional Blog Posts that I have written that may help you navigate through some of these investment account options: