What Accounts To Open?

2/26/2022

Thomas E. Kersh

     There are so many types of investment accounts that do different things for different people with different occupations. But there are some accounts that everyone should open. There are also some accounts people should never even contemplate about creating. So let's start with a 401(k).

     A 401(k) is a retirement account offered to nearly all Americans by their employers in which a percentage of each paycheck is taken before taxes. The employer will proceed to match the employee's contributions by a certain percentage. The employee may decide to invest in a few of the company’s sponsored investments. It’s usually a type of mutual fund formed by the company. But the account owner can’t withdraw tax- and penalty-free until the owner becomes 59 ½ years old. Say you do 7% from your paycheck, which we’ll say is $100. Your employer could say they’ll match dollar for dollar in contributions. So now you get $200 to invest, half of which is free money and not taxed. So a 401(k) would be one of the most beneficial accounts to open since you get tax advantages with free money from your employer.   The downside to a 401(k) is you may only invest in the employer's funds, which may feel a bit financially restrictive. But if a 401(k) ain't your cup of tea, you can always create an IRA. 

     “IRA” stands for Individual Retirement Account, and it allows you to invest in various markets. After a certain age, you may withdraw with tax benefits. But there are a ton of different types of IRA accounts. You have Roth IRAs, Spousal IRAs, Traditional IRAs, non-deductible IRAs, and many more. But the two I suggest are Traditional and Roth.

A Traditional IRA grants the owner of the account to invest pre-tax dollars which may be invested in various funds, stocks, commodities, and much more. The account becomes tax-deferred until you withdraw money with a capital gain. When the owner takes out their gains is when they pay the tax. But they cannot take out money penalty-free until the age of 72. With a Traditional IRA, you have fewer tax advantages but more investing freedom than a 401(k). This is where the more-favorable Roth IRA comes in.

     The Roth IRA is the cooler younger brother to the Traditional IRA. A Roth IRA allows you to put in after-tax dollars into investments and/or funds. Once the owner turns 59 ½ years old, they may withdraw from their gains tax-exempt and penalty-free. 

Now out of the two, I recommend the Roth IRA due to how unfavorable capital-gains tax could be in the future. It could get better or it could get significantly worse. It would be best to prepare for the worst.  Now let me get into Brokerage accounts. 

     A Brokerage account allows the owner to take after-tax dollars and invest them through a brokerage. But when they sell their investment(s) and have a capital gain, they pay the tax. I would recommend opening this account. If you withdrew from the other three retirement accounts before the designated age, you would have to pay a penalty fee and the capital gains tax. It's why a brokerage account would be significantly more favorable for shorter-term investing.  It's why saving accounts are idiotic.

     YOU SHOULD NEVER OPEN A SAVINGS ACCOUNT. Savings accounts allow the owner to put large sums of money in a protected account. The account earns extremely low to almost no interest. You get penalized if you take large sums out called an Excessive Withdraw fee. To twist the knife in the wound, the average annual inflation rate since 2001 is 2.25%. Then to add salt to the wound, that money is only insured up to $250,000 by the FDIC. Say you put $10,000 into a savings account with 0.05% interest and an Excessive Withdraw Fee of 5%.  After a year, your savings account becomes $10,005. But you forgot about inflation which we’ll say is 2%.(even though it is higher in real life . . . much higher)  This means your money lost buying power. Your $10,005 has dropped to $9,804.90. So do not be that person who puts their money in a savings account. Learn how to invest your money wisely.

     Those are the accounts I would recommend anyone to open. If most Americans were investors instead of savers, they wouldn't be panicking about inflation since stocks, ETFs, and mutual funds yield about 8%-10% a year. Meaning, you would compensate for inflation and pocket yourself some extra cash. So get your money to work for you, because one day you won't be able to work for your money.