Investment accounts are a powerful tool for building wealth and securing financial stability over the long term. There are a wide variety of investment accounts available, each with its own benefits, drawbacks, and tax implications. In this article, we’ll take a closer look at some of the most popular types of investment accounts and how they work.
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Individual Retirement Accounts (IRAs)
Individual retirement accounts, or IRAs, are a type of investment account designed to help individuals save for retirement (can you save enough to become a millionaire? Find out here). There are two main types of IRAs: traditional IRAs and Roth IRAs.
With a traditional IRA, contributions are tax-deductible in the year they are made, which means you can reduce your taxable income and lower your tax bill. The money in the account grows tax-deferred, which means you don’t pay taxes on the earnings until you withdraw the money. However, when you do withdraw the money, you’ll pay taxes on both the contributions and the earnings.
With a Roth IRA, contributions are made with after-tax dollars, which means you don’t get a tax break in the year you make the contribution. However, the money in the account grows tax-free, and when you withdraw the money in retirement, you don’t have to pay taxes on the earnings or the contributions.
Both types of IRAs have contribution limits, which vary depending on your age and income. For 2022, the contribution limit for both traditional and Roth IRAs is $6,000 for individuals under age 50 and $7,000 for those 50 and older.
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401(k) Plans
401(k) plans are employer-sponsored retirement plans that allow employees to save a portion of their salary for retirement. With a 401(k), you can contribute pre-tax dollars, which means you lower your taxable income and reduce your tax bill. The money in the account grows tax-deferred, and when you withdraw the money in retirement, you’ll pay taxes on both the contributions and the earnings.
Many employers offer a matching contribution, which means they’ll match a portion of the employee’s contribution. For example, an employer might match 50% of the employee’s contribution up to a certain percentage of their salary.
Like IRAs, 401(k) plans have contribution limits, which are set by the IRS. For 2022, the contribution limit for 401(k) plans is $20,500 for individuals under age 50 and $27,000 for those 50 and older.
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Health Savings Accounts (HSAs)
Health savings accounts, or HSAs, are a type of investment account that can be used to save for medical expenses. To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP). HSAs offer a triple tax advantage: contributions are tax-deductible, the money in the account grows tax-free, and when you withdraw the money to pay for qualified medical expenses, you don’t pay taxes on the withdrawals.
HSAs have contribution limits, which are set by the IRS. For 2022, the contribution limit for HSAs is $3,650 for individuals and $7,300 for families. Individuals age 55 and older can make an additional catch-up contribution of $1,000.
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Taxable Brokerage Accounts
Taxable brokerage accounts are investment accounts that allow you to buy and sell stocks, bonds, mutual funds, and other securities. Unlike IRAs and 401(k) plans, contributions to taxable brokerage accounts are made with after-tax dollars, which means you don’t get a tax break in the year you make the contribution. However, the money in the account can be withdrawn at any time, without penalty.