Start to Plan
Having both an emergency fund and a plan for long-term investing is important. Taking the time to think through any large expenditures you may incur in the near or distant future is key when planning your post-emergency fund savings. To start, assess if you need to save for any specific goals now or in the future such as upcoming major expenses like a home purchase, retirement planning, education funding for yourself, your children or grandchildren, or medical related costs. Doing so will give you insight on how much you should save and plan accordingly. Once you have identified your goal or goals, it is important to understand the account types that are available to you. Some common examples follow:
Common account types
Accounts available through your employer
Many employers offer retirement plans like a 401(k) or 403(b), and they may even include a Roth option in their plans which allows you to pay taxes on contributions now but withdraw funds in retirement tax-free.
If your employer offers a match in their retirement plan, it’s important to give this consideration, as it can provide a significant boost to your savings that would otherwise be left “on the table.” Ultimately, choosing the right account depends on being informed about the potential benefits and drawbacks each type of account may offer.
Retirement accounts outside of your employer.
If your employer does not offer a viable retirement plan, you can look into investing directly into a Traditional or Roth IRA.
It should be noted that some accounts are only available to those whose income falls within IRS guidelines for direct contributions.
Accounts for medical costs
If you are enrolled in a high deductible health plan, then looking into health savings accounts (HSAs) should be considered as this can pay for current and future medical costs from a tax-advantaged account.
Flexible Spending Accounts (FSAs) can also assist with certain out-of-pocket healthcare costs.
Accounts for education costs
If education funding is one of your goals, you may wish to consider using a Section 529 account.
I’ve identified my priorities, what are some differences in the account types that can help guide my decision?
Depending on your investment goals, you should consider the liquidity of the account type when making your decision. Cash held in a bank account is the most liquid asset available – you can access it quickly and easily, without worry of penalties or taxes. Meanwhile, traditional investment accounts (also known as brokerage, retail, taxable) are also highly liquid assets: if you need to withdraw funds there is no penalty, though you may have to pay any applicable capital gains taxes.
Conversely, withdrawals from retirement accounts typically come with associated penalties for early withdrawal. Understanding the differences between account types in terms of liquidity will help to guide your decision and ensure that it best suits your long-term objectives.
When selecting the best option for yourself, it’s important to consider how different account types handle taxation. For example, Section 529 accounts are an attractive educational savings option as withdrawals and any gains made from them are free from taxation when used for qualified education expenses, such as tuition and books. Furthermore, Health Savings Accounts offer tax-free withdrawals on qualified medical bills.
Finally, when it comes to retirement funds, traditional options like 401Ks and IRAs provide tax deductions on the money you put in and allow your investments to grow without being taxed until withdrawn in retirement. With a clearer understanding of each type of account’s taxation benefits and drawbacks, you’ll be able to make an informed decision about which is right for you.
Tax Policy Diversification
Diversifying your investment portfolio by account type can have positive implications for tax time. By spreading out investments into different accounts, ranging from Roth accounts Traditional retirement accounts and HSAs), you’ll be better protected if changes are made to tax policy in the future. Doing this not only helps reduce risk but also provides more options when it comes to allocating funds optimally – regardless of the current tax situation.
What’s the bottom line?
Taking the time to understand the goals you are looking to achieve with your investments and the different types of accounts available to you can help make an informed decision on where to save once your emergency fund is covered. Call us to speak to a financial planner to discuss next steps if you have additional questions or would like assistance along the way. Drawing on professional experience to assist with understanding documents, regulations and other investment details may result in a beneficial outcome for your financial future.