Understanding Different Investing Accounts

The type of account you use for investing matters almost as much as what you invest in. Different accounts come with different tax benefits, rules, and purposes. Here's a breakdown of the most common ones.

401(k) Plans

A 401(k) is an employer-sponsored retirement account. You contribute money from your paycheck before taxes, which lowers your taxable income now. Many employers offer matching contributions—essentially free money. You pay taxes when you withdraw in retirement.

Best for: Anyone whose employer offers a match. At minimum, contribute enough to get the full match.

Traditional IRA

An Individual Retirement Account (IRA) is something you open yourself, not through an employer. Traditional IRAs offer tax deductions now, and you pay taxes when you withdraw in retirement. There are annual contribution limits.

Best for: People who want tax benefits today or don't have access to a 401(k).

Roth IRA

With a Roth IRA, you contribute money after paying taxes on it. The benefit comes later—your withdrawals in retirement are tax-free, including all the growth. There are income limits for who can contribute.

Best for: Younger investors or those who expect to be in a higher tax bracket in retirement.

Taxable Brokerage Account

This is a regular investment account with no special tax benefits, but also no restrictions on when you can withdraw money. You can invest as much as you want and access it anytime without penalties.

Best for: Goals before retirement or after maxing out retirement accounts.

Which Should You Use?

Most people benefit from this order:

1. 401(k) up to employer match (free money)
2. Max out Roth IRA if eligible
3. Return to 401(k) to max it out
4. Taxable brokerage account for additional savings