If you’re reading this, you’ve presumably done the hard work of saving money, and you’ve segregated the part of those savings that you’ll need in the next five years for emergencies or near-term expenses. You’re ready to take that more-than-five-years-away money and invest it. It sounds like a simple question to ask what accounts to use. But, then, so too does, “What kind of toothpaste should I use?” Thanks to marketing, there are loads of choices these days, whether you’re talking about investment accounts or caring for your pearly whites. Here’s a quick summary of where you can invest your long-term dollars.
Investment Accounts At Work: Employer-Sponsored Retirement Accounts
Not-so-creatively named after sections of the tax code, these accounts frequently start with the number “4” - 401(k), 403(b), 457, and Thrift Savings Plans. With these accounts, you tell your employer how much you would like to contribute out of each paycheck, up to pre-specified limits (the maximum of either your employer’s limit or the government’s limit of $16,500 in 2010 if you are under the age of 50). If you are extra lucky, your employer may contribute what’s called a “match.” The means that, for every dollar you contribute, your employer may add an extra $0.50 or $1. This is a great deal. If your employer offers one of these accounts with a match, make sure you contribute at least to the point of the match.
Investment Accounts Outside of Work: Individual Retirement Accounts (IRAs)
If your employer does not offer a retirement plan that you can contribute to, you can save your hard earned Benjamins outside of work in an individual retirement account, commonly referred to as an “IRA.” Like toothpaste, IRAs also come in a variety of flavors. Unless you have the pleasant problem of earning over $105,000, the Roth IRA is the flavor for you. If you earn over this amount, I suggest moving right on up to the traditional IRA. (Technically, you can make a partial contribution to a Roth if your income is between $105,000 and $120,000…but that feels to me like using one type of toothpaste on your upper teeth and one on your lower teeth. Sure, you could, but it’s a logistical pain in the neck.) In 2010, you can contribute up to $5,000 to an IRA if you are under age 50. My favorite places to open these accounts are Vanguard, Fidelity, and Charles Schwab. (Note: You can contribute to both a 401(k) and an IRA at these brokerages.)
Overflow Investment Accounts: Taxable Brokerage Accounts
You’re smart, you work hard, and you’ve learned how to be smart with your money by reading LearnVest. Suppose that, after “maxing out” both your 401(k) and your IRA, you still have some extra money that you can set aside for long-term investing. What type of account should you use? A taxable brokerage account. You can open one at the same financial institution where you have your IRA and invest it as you see fit. This money is not “tax-advantaged” the way your 401(k) or IRA money is, but the offset is you have total control over what you can invest in and when you can withdraw money.
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