There are many account types to save your hard-earned cash! The concept of saving is important and the type of account where you stockpile cash is also very significant.
Many Kinds of Account Types
There are many types of accounts – 401(k), Taxable Account, IRA, Emergency Fund, etc.
Where should you save your money?
You have a lot of options as an individual and there are some potential options through your employer. Each account type has advantages and disadvantages.
Let us take a look at each of them.
Descriptions of Account Types
First up are Emergency Funds and they are for unexpected circumstances. Usually, it’s not a matter of “if”, it’s a matter of “when.” Life happens and you should be prepared with a rainy day fund for emergencies. The amount of money you save depends on your lifestyle and other sources of income.
Next are Health Savings Accounts (“HSA”). They are too often overlooked as a way to save money. They are the only account that is triple tax-advantaged. What does triple tax-advantaged mean?
It is quite the opposite of a triple dog dare. Here are the three tax advantages. First, the HSA contributions that you make reduce taxes today. Second, the contributions grow tax free. Third, qualified withdrawals are also tax free.
Following are 401(k) and IRAs and both are double tax-advantaged — tax-free two ways. First, these account types reduce taxes today and second, the contributions grow tax-deferred. Both are wonderful vehicles to save for retirement.
Furthermore, your employer offers Deferred Compensation accounts and they are an incredible way to reduce your taxes. There are several types of plans and they vary by employer. They are also double tax-advantaged and are an unsecured liability of your employer.
Additionally, After Tax and Mega Roth 401(k) are great ways to grow your money. They can be tax-deferred, or tax-free through a Roth 401(k). However, they do not reduce your tax liability today.
Finally, Taxable Savings accounts have no tax advantage, so this tranche should be last for your savings, unless you need a lot of liquid money in the short or medium timeframe. Remember that this bucket includes vested RSUs.
What Choices Should You Make?
How do you select what accounts to contribute to each year?
The options are endless and the taxes complicated. Making the best choices for your situation and your needs can be overwhelming.
If you would like to chat about how to get your money working for you in the best way possible, please feel free to set up a free consultation.