finance, Uncategorized

Understanding Different Account Types


Alright peeps, this is a big one. What’s the difference between a 401(k), IRA, brokerage account? What the heck is a ROTH?!

If these questions have eluded you, check out this quick and easy guide to understanding different account types! It’s important to know, so you can take advantage of tax savings and different perks that comes with different accounts. Each type of account is treated differently and can potentially serve a different purpose in your financial plan.

Think of the account types as tax codes. The IRS treats them differently, but all the while you can FUND these accounts with various tools. Any easy way to understand this is by checking out the chart below


NON Retirement

+Fundamental info: These accounts don’t have special tax treatment. You put money in after you’ve paid taxes on it, and you’ll typically pay taxes again if there is any growth when you want to withdrawal it. The tax rate depends on how long you’ve held the investment for and which tax bracket you’re in.

If you held the investment for less than a year then you”ll owe short term capital gains: It varies depending on your income but usually 10-39%

If you held the investment for longer than a year then you’ll owe Long term capital gains: Typically 10-20%. Long term gains are treated more favorably as far as taxes are concerned.

+Contribution Limits: none. You can put as much money into these accounts as you please since there really aren’t any tax benefits.

+ How do you open one: Find a broker! You can open a brokerage account at basically any bank or online broker. You’ll need to show proof of your I.D and they will want some financial information on you, but it’s pretty quick and painless to get started. Once you open your account, you can attach your bank account and transfer money.

+ What can I put in it: You can hold cash, stocks, bonds, and mutual funds within this account.


Employer Sponsored Retirement
403(b) (tax exempt company employees: teachers, nurses, doctors, ministers)
457 (certain government employees)
SIMPLE IRA (small businesses)
SEP IRA (pension for business owner)

+Fundamental info: Most people have heard of a 401(k), so that’s the one we will focus on. The basic information regarding these accounts is your employer offers them, and you can contribute while you’re employed. The money you put in is yours when you leave the company. Often times during your employment you can borrow from your 401(k) with the expectation that you’ll pay it back. The biggest benefit to these is that often times employers will match your contribution up to a certain %. That’s literally free money.

+ 401(k) Contribution limits: $18,000 annually as of 2017

How to open one: Check with your employer to see if your company offers a retirement plan. If you yourself are a business owner, you may be eligible to start your own. Meet with your financial professional to find out.

+ What can I put in it: You can hold cash, mutual funds, or company stock within this account. Depending on your plan you might be able to buy individual stocks/bonds. These accounts usually have a fund manager who you check with about which investments might be best for you.

Individual Retirement Accounts

+Fundamental Info: IRA’s are funded with PRE-tax dollars, and you pay taxes on any growth once you withdrawal money. You must have earned income to contribute to an IRA. IRAs have rules on who can contribute to them and when they are able to and must start withdrawing their funds.

There are certain exceptions, but usually you’ll be penalized if you withdraw this money before retirement age (currently 59 1/2). Anyone with earned income can contribute to an IRA regardless of income amount.

+Contribution limits:  
$5,500 if you’re between 18- 40 years old
$6,500 if you’re between 50-70 1/2 years old or your taxable income is below $6,500.

You can contribute on behalf of a spouse! Your contributions are tax deductible, and there aren’t IRA penalties if you contribute to a brokerage, 401(k), and a IRA.

+How to open one: Any bank or broker should offer IRA accounts!

+ What can I put in it: Cash, stocks, bonds, mutual funds, annuities (although generally not recommended because of the tax implications)


+Fundemental Info: Anytime you see ROTH in front of an account type, it means you have already paid taxes on the money before you put it into the account! When you withdraw the funds, they will typically be tax free! You can have  ROTH IRA or a ROTH 401(k).

+Roth IRA Contribution limits: 
Single tax payers must make less than $133,000  modified adjusted gross income (MAGI)
Married tax payers must make less than $196,000 MAGI.

Similar to IRAs you can only contribute earned income.

If you have a Roth and Traditional IRA you can only contribute the total limit for both account combined. Meaning you can’t contribute $5,500 to both, rather you could contribute to one or break up the sum into two different amounts.

It’s important to note that all these different account types will have various fees depending on the plan and where you open the account. Consider the tax implications, the purpose for the money, and how much you are paying in fees to make the most of these accounts!

As always, nothing on this website should be construed as financial or tax advice. Please consult with your financial professional before investing!






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