Hi Fourward friends, it’s me, Alyssa!
I’ll be sharing some of my expertise. My experience and training are in Finance, specifically financial planning. I have a Bachelor’s in Finance from UW-Madison, and received my MBA from the University of North Carolina Kenan-Flagler Business School. A few weeks ago we took a poll, and you all voted to hear from me about where to invest! So here is my personal take on this matter. But of course, you still have to do your research or ask a Financial Advisor to learn more and to know what best suits you.
Last year’s health crisis made us all rethink our financial situations. This year, you may want to start saving but have no idea where to put your hard-earned money. Take note, investing is not just about putting money in the stock market. If you know the basics of investing, it will be much easier to make it grow. This article tackles the best types of investment savings accounts from a tax savings perspective, and their pros and cons so you can decide better. Let’s get started!
1. Employer Matching Programs 401(k) etc.
Why I Like It: Free money! This is a no-brainer, I’m just putting it in case any readers who have access to this aren’t taking advantage. Don’t go opening a Schwab account if you haven’t even gotten your full 401(k) match yet.
Requirements: An employer that offers a matching program. Typically have to contribute part of your income to qualify (for example if you contribute 6%, they do 4%)
Drawbacks: None. It’s free money. Sure, my take-home check is smaller, but I can figure it out. Being more intentional with my finances can go a long way. There are a lot of penalties for withdrawing early, but I put it in my mind this is for 30 years from now.
Why I Like It: The ONLY account where you do not pay ANY taxes. Usually comes with a debit card, which I find super convenient and use for co-pays. Lower insurance premiums. If you have one of these try to MAX IT!!!!
Requirements: Must be on a High-deductible Healthcare plan to qualify. 2021 contribution limit of $3,600 if you have individual coverage. Often a minimum account balance needed before you can use it to invest (mine is $1,500)
Drawbacks: HDHP requirements may not be an available or good fit for all. Funds must be used to cover medical expenses, although this is broad (e.g. sunscreen and bandaids count). It may not be a good investment vehicle for people who need the account for medical expenses.
3. Roth IRA
Why I Like It: This is a special after-tax account. The money going in is income I already paid taxes on. As a result, when I start taking out the money in retirement, I won’t have to pay any taxes on it. This is especially dope since we currently have historically low tax rates: it’s almost guaranteed any taxes I’d have to pay in 30 years is way higher than the taxes I’m paying now.
Requirements: 2021 max contribution limit of $6,000 if you are under age 50. Singles who make over $140,000 are not eligible to contribute.
Drawbacks: This is a special retirement account aka there are penalties for withdrawing early. In my mind, once the money is in there it’s gone.
Why I Like It: Ok, I know it’s technically not an investment account, but because my primary investment strategy involves putting most of my money in accounts I can’t access, it’s super important for me to have an emergency fund. It’s recommended to have 3-6 months of essential expenses (bills, rent, groceries, etc.) if possible. I personally keep this money in a High Yield Savings account at Varo just because I’m pretty aggressive about growth, but it is slightly riskier than traditional savings.
Drawbacks: Trying to max other accounts AND build my savings at the same time was super hard, but now that I have done it I haven’t had to touch those funds and they are there if I need them.
5. Non-Qualified Brokerage Account
Why I Like It: This is the kind of account most people think of when they think of investing (Stocks, Bonds, and Mutual Funds). I like it because I have a lot more control over what I invest in, so this is what I use to invest for fun. Because it’s not a special account, I can withdraw funds whenever I need them.
Drawbacks: The money going in this account is money I already paid taxes on. On top of that, when I sell a stock for a profit, I ALSO have to pay taxes on that. If I buy $100 in Apple and sell it for $200, I have to pay taxes on the $100 profit. This is called Capital Gains, and none of the other accounts mentioned are subject to them due to their special tax status. Literally, the point of this post is to highlight that if you put all of your savings investments in ONLY a brokerage account, over decades that can cost thousands and thousands and thousands in tax burdens. Here’s a great guide on how to get started in investing in this way.
6. Pre-Tax Accounts Above Match (401(k), 403(b), etc.)
Why I Like It: Pre-tax accounts take money from your paycheck before taxes. This means the money you put into this account lowers your annual income and tax burden.
Requirements: Must have an employer that offers one. 2021 max contribution limit of $19,500.
Drawbacks: Once you begin withdrawing, you have to pay taxes on it as income; however it is not subject to Capital Gains. Technically, for tax purposes this is a better account than a normal non-qualified brokerage account, but *I* do not have enough disposable income to max out my 401k, let alone contribute to another investment account afterward. If I had the income, my strategy would be to MAX all my special-tax accounts, THEN invest in a brokerage account.
7. Education Accounts/529 Plans
Why I Like It: This is another tax-advantaged account I personally don’t need too much as a childless non-student, but as an aunt and friend of parents, this is an amazing account. Money invested is tax-free when withdrawn for education purposes. Usually set up by parents/grandparents for a child, but anyone can set one up. Each state has its own program, but the money can almost always be used out-of-state. If money is left after graduation, the entire account can be transferred to another student.
Requirements: Must be used for education expenses: including tuition, room and board, textbooks, etc. Primarily used for secondary education (incl. community college), a max of $10,000/year can be used for K-12 expenses.
Drawbacks: Tax implications if used on non-qualified expenses.
You can consider your investment savings as another revenue source, a retirement fund, or even an emergency fund. We can gain a more comfortable future by investing. A stable economy is not a guarantee; we have to do our research and prepare for the uncertainties of the future.