Use the Right Types of Investment Accounts For Your Biggest Financial Goals
Retirement. College. Buying a new car. The house of your dreams. We all have big life goals that require money, and investing is a tried-and-true strategy to help make it happen. Even better: certain investment accounts are geared toward helping you realize some of your dreams for the future.
So let’s take a deeper dive into different types of investment accounts that can put you on the path to being set up for success.
Some of the most familiar investment accounts are designed to help you save and invest for retirement. Full-time salaried workers often have a 401(k) plan offered through private employers; thrift savings plans, 403(b); or 457 accounts for workers with public employers, a nonprofit, government agency or public school district.
Funding these accounts is easy: a portion of your paycheck is diverted and invested into the retirement account, and you can adjust the contribution amount as well as investment types offered through the plan.
If you make traditional, or pretax, contributions, you get a nifty tax deduction on contributions and pay taxes on withdrawals.1 This gets you a nice tax break today, but if your funds enjoy good growth over many years, you could possibly pay more in taxes later.
If that sounds like a sour deal, check to see if your employer offers Roth, or post-tax contributions. That means you pay tax on the contributions, aka money going into the account, but then you never pay taxes on that money ever again. So, if these funds enjoy good growth over many years, you already paid tax and are free to do what you wish with that growth!
You don’t have to get a retirement account through your employer. Individual retirement accounts, also known as IRAs, are available to pretty much anyone via most major financial institutions (including USAA) and are a great option for folks who freelance, have moonlighting gigs or are self-employed.
What makes these retirement investment accounts special? Depending on what’s available to you, due to your employment status, income threshold, age and how much you want to sock away, these accounts come loaded with tax advantages that are designed to help you reach your goal faster.
Another big life goal that investing can help you achieve is saving for a child’s — or your own — college education. If you want to save toward primary or secondary school, a Coverdell Education Savings Account is worth looking into.
But the real workhorse type of investment account for funding kids’ college is the 529 College Savings Plan, a tax-advantaged investment account that lets you enjoy tax-free growth and withdrawals as long as the funds are used for qualified educational expenses (like tuition).2
Unlike retirement accounts, which have clearly set maximum annual contribution limits, 529 account contribution limits vary among states, ranging from $235,000-$425,000. What states are trying to do here is estimate the full cost of attending an expensive school and graduate school (including room and board), but of course that amount does (and will continue to) change.
Each state offers its own 529 plan, and the funds can be used for eligible colleges in any state, but it’s better to aim for saving enough for tuition at a school in your home state.
If you want more flexibility in what your funds are used for, an individual (or joint) brokerage account or mutual funds account may do the trick.
Brokerage accounts are ideal if you want to invest money with more freedom. Unlike retirement or college savings accounts, you can use the funds for whatever you like and don’t have to worry about early withdrawal penalty fees, or combing government websites for “eligible” expenses.
With brokerage accounts, you are on the hook for paying tax on any profit made on your investments (known as capital gains), though you do get a little break when you sell investments that have gone down in value. This is known as tax loss harvesting, which lets you “harvest” losses by deducting some of the loss amount from your reported income. If you have a large amount of losses, you might even be able to carry some of those losses forward to next year’s taxes.
Remember, investing doesn’t have to be limited to retirement and college savings. You can invest to help yourself achieve any big life goal, from buying a car to saving up for a down payment on a new home. Just remember that the types of investment accounts you use may help you make your dreams a reality.
Have a specific question about investment account types? Talk to a USAA financial advisor at (800) 427-USAA.
Investments/Insurance: Not FDIC Insured ∙ Not Bank Issued, Guaranteed or Underwritten ∙ May Lose Value
¹Withdrawals made before age 591/2 may be subject to a 10% federal penalty and ordinary income taxes.
² Tax-free earnings and withdrawals are for qualified educational expenses. Other withdrawals are subject to income tax and an additional 10% penalty on earnings. The availability of tax or other benefits may be contingent on meeting other requirements.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.
Depending upon the laws of your home state or the home state of the designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if you invest in the home state’s college savings plan. You may wish to contact your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers, and affiliates.
Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
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