Types of Accounts
You can choose among personal accounts, like IRAs, that offer tax advantages, IRA rollovers, and brokerage accounts for investing in individual stocks and bonds. At work, you’ll find employer plans like 401(k)s, 403(b)s, and non-qualified plans for high earners, or possibly special plans just for small businesses.
IRA stands for Individual Retirement Account (or sometimes, Individual Retirement Arrangement). An IRA is not an actual investment but rather a personal account in which you can hold stocks, bonds, mutual funds and other assets. These accounts let you put money away for retirement, allow earnings to grow tax deferred, and not have to pay taxes until you make a withdrawal. You’ll learn that Roth IRAs have the unique privilege of allowing you to take withdrawals income-tax free once you reach certain milestones.
According to the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey, the percentage of workers who are not at all confident about having enough money for a comfortable retirement grew from 22 percent in 2010 to 27 percent in 2011. This decrease in confidence is most obvious among those who have not saved enough to meet their future retirement income needs.
A brokerage account allows you to invest money with a licensed brokerage firm and then direct the firm to place buy and sell orders for individual investments, such as stocks, bonds and mutual funds, on your behalf. The firm handles all of the transactions and sends you confirmations and statements detailing your trading activity.
Named after a section of the Internal Revenue Code, a 529 plan is a special savings plan designed to help you set aside money to help cover college tuition and expenses. These plans offer flexible contributions and the potential for tax-deferred investment growth and tax-free withdrawals for qualified educational expenses at any eligible college or university nationwide. Most states offer at least one 529 plan.
If withdrawals from a tax-deferred account are taken prior to age 59 ½, an IRS 10% premature distribution penalty tax may apply. Money taken will be taxed as ordinary income in the year the money is distributed. Account values fluctuate with market conditions, and may be worth more or less than the original amount invested.
Investments are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, may be worth more or less than the original investment.
Before investing in a 529 plan, you should consider whether the state you or your designated beneficiary reside in or have taxable income in has a 529 plan that offers favorable state income tax or other benefits that are only available if you invest in that state's 529 plan.