The account you use decides how your investments are taxed and when you can touch the money. The same index fund can leave you with very different amounts depending on the account it sits in.
Taxable brokerage account
- Anyone can open one, with no contribution limit and no withdrawal restrictions.
- Dividends and interest are taxed each year; selling at a profit creates capital gains (how capital gains are taxed).
- Best for goals before retirement or money beyond retirement limits.
Employer plans: 401(k), 403(b), 457(b)
- Contributions through payroll, often with an employer match.
- Traditional (pre-tax) or Roth (after-tax) versions.
- High contribution limits; penalties for most withdrawals before 59½.
- Details in what a 401(k) is.
Individual retirement accounts (IRAs)
- Traditional IRA: contributions may be deductible depending on income and workplace plan; withdrawals taxed later.
- Roth IRA: after-tax contributions, tax-free qualified withdrawals, income limits apply. See Roth IRA explained.
- SEP IRA and SIMPLE IRA: for self-employed people and small businesses.
- Rollover IRA: holds money moved from an old employer plan.
Health savings account (HSA)
Available with a qualifying high-deductible health plan. Contributions are deductible, growth is tax-free, and withdrawals for qualified medical expenses are tax-free. Many people invest the balance and pay current medical costs out of pocket, letting the HSA grow.
Education: 529 plans and Coverdell ESAs
529 plans are sponsored by states. Growth is tax-free when used for qualified education costs, and many states offer a deduction. Unused money can, under certain conditions, be rolled into a Roth IRA for the beneficiary, within lifetime limits.
Custodial accounts (UTMA/UGMA)
An adult manages investments for a minor; the assets legally belong to the child, who gets control at 18 to 21 depending on the state. See teaching kids about investing.
Which to use first?
A common order: 401(k) up to the match, then an IRA (or HSA if eligible), then more 401(k), then taxable. Your situation may differ, but the principle is to use tax-advantaged space before taxable accounts. The IRS retirement plans section has the official rules and current limits.
