Comparison of Investment Account Types
Individual Retirement Account (IRA)
An Individual Retirement Account (IRA) is a type of investment account that allows individuals to save for retirement with tax advantages. There are two main types of IRAs: Traditional and Roth.
Traditional IRA
– Contributions are made with pre-tax dollars
– Earnings grow tax-deferred
– Withdrawals are taxed as ordinary income
– Required minimum distributions (RMDs) must begin at age 72
Roth IRA
– Contributions are made with after-tax dollars
– Earnings grow tax-free
– Qualified withdrawals are tax-free
– No required minimum distributions
401(k)
A 401(k) is a retirement savings plan sponsored by an employer. Employees can contribute a portion of their salary to the plan, and employers may also make contributions.
Traditional 401(k)
– Contributions are made with pre-tax dollars
– Earnings grow tax-deferred
– Withdrawals are taxed as ordinary income
– Required minimum distributions (RMDs) must begin at age 72
Roth 401(k)
– Contributions are made with after-tax dollars
– Earnings grow tax-free
– Qualified withdrawals are tax-free
– Required minimum distributions
Brokerage Account
A brokerage account is a taxable investment account that allows individuals to buy and sell stocks, bonds, mutual funds, and other securities.
– No contribution limits
– No tax advantages
– Capital gains and dividends are subject to taxes
– No restrictions on withdrawals
529 Plan
A 529 plan is a tax-advantaged savings plan designed to help families save for future college expenses.
– Contributions grow tax-deferred
– Qualified withdrawals for education expenses are tax-free
– Some states offer tax deductions or credits for contributions
– Limited investment options
Overall, the best investment account type for you will depend on your individual financial goals, risk tolerance, and time horizon. It’s important to consider factors such as tax advantages, contribution limits, and withdrawal restrictions when choosing the right investment account for your needs.
