4 Must Have Investment Accounts

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We are going to be diving into investing!! Investing can be kind of scary and intimidating but it is sooo beneficial. I have a similar post discussing the 4 must have savings account types but today is all about INVESTMENT accounts.

It took me a while to start investing, two years to be exact, because I was intimidated. I had an account all set up and I would contribute to it every month; but the cash would just sit in the account and wasn’t actually being invested. Learn from my mistakes and avoid doing this!

If you are brand new to investing, I have several other investment basics posts to help you get started. One talks about how to actually start, some terms to learn and if you should invest vs. save.

Let’s dive into the four investment accounts I think everyone should have no matter what!

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Table of Contents

401k

What is a 401k?

A 401(k) is an employer offered, tax advantage retirement savings plan.

Your employer directly takes money out of your paycheck and contributes it into this account on your behalf. Depending on how much you want to contribute as a percentage of your salary or a specific dollar amount.

Traditional 401k vs Roth 401k

Typically employers offer both a traditional 401k and a Roth 401k.

A Roth 401k means your contributions are AFTER tax. Income tax was paid, then the money was contributed. Then, during retirement, you won’t have to pay taxes on ANY of that money.

On the other hand traditional 401k contributions are before tax. This is awesome because that money then becomes a tax deduction, making your income taxes go down! However, when you use that money in retirement, you have to pay the taxes.

TLDR

Roth / after-tax = pay taxes now, money grows and you pay zero later

Traditional / pre-tax = current taxes decrease, money grows tax free, then you pay taxes in retirement.

For a 401k I’d recommend having a traditional, pre-tax account.

There are other ways to get Roth exposure (keep reading) and I personally think saving money on your tax payments now, taking that saved money and investing it in a Roth IRA (more on what that is later) is the best course of action.

Another money blogger, Money with Katie, has an awesome post explaining why a traditional 401k is better and I agree with what she’s saying, you can check out that post here. The key is actually investing those tax savings!

Additionally, sometimes your employer can offer you a match amount to encourage you to participate in the plan.

A 401k match = FREE MONEY.

A 401k match is when your employer contributes money into your retirement plan, based on how much you personally are contributing.

Simply put, it is free money your employer will give you; if you meet the contributions requirements they set, for your specific plan.

401k matching contributions will vary widely from employer to employer. The most common match (according to Investopedia) is 50 cents on the dollar up to 6% of the employee’s pay.

This means, when you contribute 6% of your pay into your 401k plan, your employer will also pay 3%.

Math Example

Let’s say, you make $60,000 a year. Your employer match is 50% up to 6%.

If you contribute 6% of your salary or $3,600 a year, your employer will also contribute 3% or $1,800 a year.

However, if you only contribute 4%, or $2,400 a year; your employer will only contribute 2% or $1,200. That means you are losing a free $600 every year.

At the time of writing this, my personal employer match contributions equal $8,183.19. With market gains that is $8,992.94. That’s almost a FREE 9,000 dollars and all I had to do was make sure I was contributing at least 6%.

This number is from working for 3 years and hitting the matching requirements every year.

You can get free money too! Take advantage of your 401k match!

Other 401k benefits

The employer match is for sure the best benefit (nothing beats free money) BUT, I also like that 401k’s take money out of your paycheck directly, so you never see that money. Aka you’re not tempted to spend it because it never touched your bank account.

Additionally, as mentioned before 401k’s are tax advantage accounts! So regardless you’ll be saving money on taxes now or later!

Roth IRA

What is a Roth IRA?

A Roth IRA is an Individual Retirement Account, anyone with earned income can open.Most big banks and brokerages offer this account.

As we discussed in the 401k section, Roth means you contribute money AFTER tax.

You pay taxes now, then your money can grow and you don’t pay any taxes on your contributions or earnings when withdrawing them after age 59.5; making all your future withdrawals tax free.

You can contribute $6,000 annually or $7,000 if you are older than 50.

Positives

The biggest pro to a Roth IRA is that your money will not be taxed when withdrawn after age 59.5! This means if you have $1 million dollars in this account, you won’t pay any taxes on it!

This account is perfect for people just starting out or at the beginning of their career.

Negatives

Roth IRAs have income eligibility requirements. If you make more than $144k a year, you are not eligible to contribute into this account. Additionally, if you make anything between $129k and $144k you are only eligible to contribute a partial amount; not the full $6,000.

However, there are ways to get around this (The Backdoor Roth) so it’s really not too bad of a negative. You’ll just have to take some additional steps.

Second, if you withdraw before the age requirement of 59.5 you may be penalized.

Your contributions regardless of age or how long you’ve had your account can be withdrawn tax-free and without penalty! However any earnings on those contributions withdrawn will be subject to a 10% penalty depending on why you are withdrawing.

The exception: if you’ve had your account for 5+ years and are withdrawing money for a first time home you will not be penalized. You can withdraw up to $10,000 in this case.

Overall Thoughts

A Roth IRA is an awesome retirement account! It is extremely easy and accessible to open from any major brokerage.

Having a Roth IRA in addition to a Traditional 401k gives you exposure to both the pre-tax and after tax side of things! You can take the money you’re saving with the tax-break from the Traditional 401k and use that to max out your Roth IRA!

I’d highly recommend trying to max out this account ($6,000) every year if you can!

HSA

What is an HSA?

HSA stands for Health Savings Account. An HSA is a tax-advantage account designed to save for qualified medical expenses. To have an HSA you must have a high-deductible health insurance plan.

Typically this account is offered through your employer however individuals can open HSA accounts as well.

You are allowed to contribute $3,650 dollars annually.

All the money you contribute is tax-deductible. Meaning you aren’t paying any taxes on that money, lowering your income tax. Additionally, all your withdrawals are also tax-free when used for qualifying medical expenses.

You can use this money to cover payments towards your deductible or for expenses not included in your health insurance plan.

If you don’t use all the money saved for the year, it will get carried over into the next year and the next year, you don’t lose it.

Additional Benefits

An HSA is a great way to save for your out of pocket medical expenses but it also offers an investing retirement opportunity. The money in this account can be invested!

Once you turn 65 you can use your account for non-medical expenses, however the withdrawal will be taxable as income. Your HSA essentially becomes another IRA after age 65. If you don’t want to pay any taxes though, you can continue to use your HSA for qualified medical expenses!

Medical expenses are extremely pricey, about 8.5% of people older than 65 have medical debt. Using a Health Savings Account while you’re young and letting it grow tax free, is a great way to plan for unexpected medical bills in your old age.

Taxable Trading Account

Last but not least! A regular trading account. This account is for you to invest any extra money you may have after maxing out all your tax-advantage accounts first.

Investing can be pretty intimidating but making sure your money is in the market is incredibly important. Yes, we have maxed out all the retirement accounts but that’s not always enough for retirement, especially if you’re considering retiring before 65. Let your money work for you and prepare yourself for the retirement you want to live.

Once you have this account set up and you are contributing to it, make sure you are actually investing that money; it’s not just sitting there in cash. Alternatively, you can find a robo-investor to do the hard work for you.

I personally use Betterment as my robo-investor. I find it pretty stressful to ensure I’m consistently going into this account and making purchases, staying diversified and keeping up with my investments. So I use Betterment. All I have to do is deposit money and they do the rest!

There is a small fee, but this fee is well worth my time and energy.

I highly recommend using a robo-investor when you’re new to investing. There are several other options besides Betterment including Wealthfront and SoFi so find one that works best for you!

Final Thoughts

There you have it! All the need to know investment accounts!! If you’re wondering what order to start investing in these check out this post here.

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