Investment Vehicles

A 401k is a retirement account available only through your employer at the investment management firm of their choice. 

You can contribute up to a certain limit each year, either pre-tax or post-tax/Roth. Most employers offer a pre-tax match, meaning they'll match your contribution up to a certain percentage. For instance, a 7% dollar-for-dollar match means if you contribute 7% of your income, the company matches that amount. Some companies have a dollar limit for matching, such as $2,000 per year. 

Even with competing priorities, contributing to your 401k to get at least the match is crucial as it's essentially free money.

It's worth noting that having money in a 401k doesn't guarantee it is invested. While there may be default investing options, ensure that your money isn't just sitting there as cash but is invested in something.

Unlike 401ks, Individual Retirement Accounts (IRAs) are accessible to anyone, regardless of employment status or existing 401k enrollment. The advantages of IRAs include access to a variety of investments similar to those available in regular brokerage accounts, unlike 401ks, which limit investment options to those offered by employer plans. Additionally, if you lack access to a 401k, you can contribute to an IRA up to the annual maximum defined by the IRS (which, for 2024, is $7,000 for those under age 50 and $8,000 for those age 50 or older).

IRAs can be either pre-tax or Roth (post-tax). With pre-tax contributions, such as the $7,000 example, your overall taxable income for the year decreases by that amount. However, upon retirement and withdrawal, taxes are levied on the contributions and any earned income based on your income level at that time. Pre-tax contributions are advisable for individuals earning more presently than anticipated in the future when accessing these accounts.

As for Roth IRAs, their benefits warrant a separate post, as they delve into intriguing tax implications.

It's important to mention that unlike 401ks, which don't have income limits, if you earn above the annual income threshold for an IRA or a Roth IRA, contributing to the account isn't as straightforward. You may need to consider IRA conversions to contribute effectively.

High-yield savings accounts distinguish themselves from traditional savings accounts by offering a higher interest rate, enabling your money to grow more rapidly while it remains in your account. Typically, they yield an average interest rate of 4-5%. The best part? Your funds are FDIC secured, ensuring that your principal balance remains intact, unlike with stock investments. HYSAs serve as excellent tools for establishing a short-term emergency fund and saving for near-term goals, such as a down payment. I recommend the SOFI HYSA for its solid returns and user-friendly app interface.

While retirement accounts offer tax-deferred or tax-free investing benefits, brokerage accounts excel for near-term investments. In a brokerage account, you have access to a diverse array of investment options including stocks, bonds, index funds, and mutual funds. If you refrain from selling investments, you won't incur taxes on the earnings. The taxation of earnings hinges on the investment's holding period.

For instance, let's consider a scenario: You invest $1000 in a standard S&P 500 index fund within a brokerage account. If you sell the fund within a year of purchase, the earnings are taxed at your federal income tax rate. However, holding the investment for over a year yields tax benefits, as the earnings are taxed at the lower capital gains tax rate upon sale. For a detailed exploration of capital gains tax rates, check out this insightful post by Fidelity.

Brokerage accounts offer flexibility for investing in a broader range of options compared to a 401k, and they are ideal for shorter-term goals. It's important to note that for investments to grow, a longer time horizon is beneficial, allowing for the advantages of dollar-cost averaging and market fluctuations.