How to navigate the alphabet soup of account types
IRA, 401(k), 529, HSA, 403(b), TSP, 457 — it’s almost like the finance industry is trying to confuse you with so many different account types. Let’s clear up some of the confusion by breaking down what each type of account is for, and whether you should think about using it.
Tax-advantaged accounts
Each of the accounts below is tax-advantaged in the sense that you won’t pay taxes on capital gains, dividends, or interest income from your investment earnings. They each have plusses and minuses, but all can fit into your overall investment strategy.
IRA — Individual Retirement Accounts — IRAs are usually your first choice account for retirement saving. They allow you to save up to a maximum amount each year for your retirement nest egg, and invest that money into most types of investments. Depending on the type of IRA you invest in, you’ll either pay taxes before you contribute (Roth) or when you withdraw (Traditional). There are limits that prevent you from saving into Roth accounts above a certain income level, and a 10% penalty applies if you withdraw before you’re 59.5 years old.
