The best investment account for every financial goal
Like a fine wine, your investments should improve with age. And it is important to find the right agreements. Once you’ve set a goal, it’s time to choose the right account to help you achieve it.
What kind of goals are we talking about?
Retirement. Because working forever probably isn’t at the top of your to-do list. Here are some popular options:
401(k): A retirement account that you get from work. With a traditional 401(k), you won’t pay taxes until you cash out. Some bosses sweeten the deal by matching some of your contributions. 401(k)s were created by Congress…so there are rules. You can contribute up to $20,500 in 2022. Plus up to an additional $6,500, if you’re 50 or older. Hint: this is called a catch-up contribution. And since that money is meant to be used in retirement, withdrawing it too soon means you’ll pay a 10% penalty and income tax.
403(b): A 401(k) for people who work in a public school, charity, nonprofit, or other tax-exempt organizations. The same contribution limits, tax rules and penalties apply.
IRA: Stands for Individual Retirement Account. Because HR stays out of it. You open your own bank account and contribute in after-tax dollars – up to $6,000 in 2022 and 2021 or $7,000 in total, if you’re 50 or older. (Psst… you have until April 15, 2022 to make contributions in 2021.) With a traditional IRA, your contributions may be fully or partially deductible. depending on your income and tax status. This means you may owe less tax now. Then you will pay taxes in retirement when you withdraw the money. Withdraw too early and you will incur the 10% early withdrawal penalty.
Roth IRA: Another flavor of the IRA where you pay taxes up front and cannot deduct your contributions. This time, the money you withdraw in retirement is tax-free. The limits are the same as a traditional IRA…unless you make a lot of money. Another difference: you can withdraw Roth contributions whenever you want – without penalty and without tax. Key word: contributions. Any investment income must remain in place. (Psst… there is Roth versions of 401(k)stoo.)
SEP IRA: As in, Simplified Employee Pension IRA. Better known as an IRA for the self-employed or small business owners. You can open an account for yourself. Or yourself and your employees. The contribution limit is 25% of the employee’s salary or $61,000 for 2022 (or $58,000 for 2021), whichever is lower . Withdraw early and you pay a penalty. Do you have any other questions about how it works? The taxman has answers.
What if I want to invest for something other than retirement?
Check out the “regular taxable brokerage account”. Many syllables, very few rules. It’s a catch-all account for the money you’ll need before retirement – for a home down payment, to start a new business, pay for a future wedding, etc. There are no contribution limits or penalties for withdrawing your money at any time. Or tax benefits. Uncle Sam wants a share of your profits and fees capital gains tax on the money you make by selling investments.
What if I need help to cover my education costs?
That’s what 529s are for. You can use these accounts to invest for anyone: yourself, your kids, a neighbor, anyone. Most states offer tax deductions or credits for contributions, and you generally won’t owe tax on withdrawals – as long as the money is used for eligible expensessuch as tuition, books and room and board.
I get it. Nothing else?
Another big one: HSA, aka Health Savings Accounts. These are investment accounts into which you contribute pre-tax money from your salary to future healthcare costs. Think: doctor’s appointments, prescriptions, flu shots, acupuncture, etc. For 2022, singles can contribute up to $3,650 (or $3,600 in 2021). Families can invest up to $7,300 (or $7,200 in 2021). And add another $1,000, if you’re 55 or older. HSAs are not for everyone. To qualify, you must be enrolled in a high-deductible insurance plan. Oh, and if you use your HSA funds for happy hour instead of health care, you’ll pay a 20% penalty and tax. On the bright side, unused funds are renewed each year.
Part of smart money management is putting it in the right place. Let your goals guide you and choose an investment account with the benefits that can help you achieve them.
Updated February 23 to include information for the 2022 and 2021 tax years.
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