Want to invest? First, you need somewhere to put your money. But with 401(k)s, IRAs, Roth accounts, and regular brokerage accounts, it's easy to get confused. Here's a plain-English guide to the different types of investment accounts and when to use each one.
Two Categories of Accounts
All investment accounts fall into one of two buckets:
Taxable Accounts
No special tax treatment. You pay taxes on dividends and capital gains as you go. No restrictions on access.
Tax-Advantaged
Special tax benefits but with rules and restrictions. Includes 401(k)s, IRAs, and more.
Tax-advantaged accounts save you money on taxes but limit when and how you can access your money. Choose based on your timeline and goals.
Employer Retirement Accounts
Traditional 401(k)
Most CommonThe most common employer-sponsored retirement plan. You contribute money from your paycheck before taxes are taken out, reducing your taxable income now. You pay taxes when you withdraw in retirement.
Employer Match
Free MoneyMany employers match a percentage of your contributions. If your employer matches 50% up to 6% of your salary, and you earn $100,000, contributing $6,000 gets you $3,000 free. That's an instant 50% return!
Always contribute at least enough to get your full employer match. It's literally free money that you're giving up otherwise.
For nonprofits, schools, and hospitals. Works similarly to a 401(k) with the same limits.
For government employees. Bonus: you can contribute to both a 457 and a 401(k)/403(b), doubling your tax-advantaged savings!
Individual Retirement Accounts (IRAs)
You open these yourself at a brokerage. They're available to anyone with earned income, regardless of whether your employer offers a retirement plan.
Traditional IRA
Tax-DeferredContributions may be tax-deductible (reducing your taxable income), and investments grow tax-deferred. You pay taxes when you withdraw in retirement.
Roth IRA
Fan FavoriteYou contribute after-tax money (no upfront deduction), but all growth and withdrawals in retirement are completely tax-free. If you invest $7,000 and it grows to $70,000 over decades, you pay zero taxes on that $63,000 gain.
You can withdraw your contributions (not earnings) at any time without penalty. This makes the Roth IRA a decent emergency backup, though ideally you'd leave it alone to grow.
For most retirement accounts, withdrawing before age 59½ triggers a 10% penalty plus regular income taxes. There are exceptions (first home, medical expenses, etc.), but generally, retirement accounts should be left alone until retirement.
Taxable Brokerage Accounts
A regular investment account with no special tax treatment. You can open one at any brokerage (Fidelity, Schwab, Vanguard, etc.).
Brokerage Account
Most FlexibleNo contribution limits—invest as much as you want. You pay taxes on dividends each year and capital gains when you sell investments for a profit. Your money is always accessible.
When to use: After you've maxed out tax-advantaged accounts, or for goals before retirement (buying a house, starting a business, early retirement).
Other Account Types
Triple tax advantage: Contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. After 65, you can withdraw for any purpose. 2024 limits: $4,150 individual, $8,300 family.
For education savings. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses (tuition, books, room and board).
For self-employed people and small business owners. Higher contribution limits than regular IRAs—potentially up to $69,000 in 2024.
The Priority Order
With so many options, here's a general order of operations for most people:
401(k) Up to Employer Match
Free money. Don't leave it on the table.
Max Out HSA (If Eligible)
The triple tax advantage is unbeatable.
Max Out Roth IRA
Tax-free growth for decades is powerful, especially when young.
Max Out 401(k)
Fill up the rest of that $23,000 limit.
Taxable Brokerage
Once tax-advantaged space is full, invest here for flexibility.
Quick Comparison
The Bottom Line
Investment accounts are just containers for your investments. What matters most is that you're investing consistently, regardless of which account you use.
Start with the low-hanging fruit: get your full employer match, then consider a Roth IRA for tax-free growth. As your income and savings grow, you can optimize further.
The best account is the one you actually use. Open one today if you haven't already.