Personal financial accounts are an essential element of savvy money management. There are many types of these accounts, making it confusing to know which ones you need to have.
This article provides a brief overview of six such accounts you need to have.
Checking Account
This is transactional bank accounting, which means you can use it to make online or offline deposits, cash withdrawals, and other transactions.
Most checking accounts provide security for your money because the majority of them are insured by the Federal Deposit Insurance Company (FDIC).
The drawbacks of checking accounts include no or low interest rates, monthly fees, and they may require a minimum balance to open them.
High-Yield Savings Account
This is an account that allows you to save and grow your money through interest rates. It’s not unusual to find high-yield savings accounts that deliver 10–20 times the interest of traditional savings accounts.
Like a checking account, a high-yield savings account offers protection through the FDIC or the National Credit Union Administration (NCUA). Not only can you access your money on short notice, but your interest income isn’t tied to stock market performance.
Traditional Individual Retirement Account
This account, also called a traditional IRA, provides for tax-exempt contributions and tax-deferred growth. The contributions you make lower your tax bracket and your income taxes in the year you make them. It's ideal to use this strategy when you're established in your career and earning the highest income.
Income tax kicks in when you begin taking withdrawals in retirement. For most, this will be in the form of required minimum distributions.
If you use your savings for certain purposes, you won’t incur early withdrawal penalties.
Roth IRA
This account allows you to make contributions with after-tax dollars. As a result, you incur no income taxes on the interest or growth you earn. While you can start making withdrawals from your Roth IRA at 59½, growth on your savings is most impressive when you leave the account alone for as long as possible.
The Roth IRA's superpower is best put to use when you start contributing early in your career, giving the account plenty of time to grow tax-free.
Health Savings Account
This is a tax-advantaged account designed for an individual or family covered under a high-deductible health plan (HDHP) for qualified medical expenses. You make contributions with pre-tax dollars.
You aren’t taxed on your investment growth or withdrawals if they are used toward qualified medical expenses.
Unlike the “use-it-or-lose-it” approach of Flexible Spending Accounts (FSAs), your balance does not disappear at the end of the year.
HSAs require having a high-deductible health plan to open, which means they may not be available to all individuals.
401(k) Account
This employer-sponsored and tax-advantaged account allows individuals to automatically save a certain percentage of their income for retirement. At least be sure to take advantage of any matching contributions your employer may offer. This is the first and simplest way to double your efforts.
A 401(k) account can be rolled over to various employers over your lifetime.
Conclusion
Contact JDH Wealth for personalized financial planning. This will help you determine which combination of accounts is right to help you reach your financial goals.
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