Most of us have financial goals that involve saving money. For example, we may want to save for retirement, build a rainy day fund, prepare for future healthcare needs, save for our child’s education, build our wealth, or something else.

And we need to put those savings somewhere. The “where” — the account we choose — can make a difference because some accounts are designed specifically to help us achieve a certain goal by providing special tax advantages, while others do not but may still fit certain goals better.

So, let’s talk about some of the different accounts you can use to save and invest in so you can better determine which account to use and when. Specifically, we’ll cover the following accounts:

Taxable accounts, including Savings and Money Market Accounts, Certificates of Deposit (CDs), and Taxable Brokerage Accounts

Tax-advantaged accounts, including:

• Traditional IRAs
• Roth IRAs
• Employer-sponsored retirement plans, such as the 401(k)
• Health Savings Accounts or HSAs
• 529 College Saving Plans

TAXABLE ACCOUNTS

Taxable accounts are pretty straightforward, flexible, and commonly used. Examples of taxable accounts include Savings Accounts, Money Market Accounts, Certificates of Deposit (CDs), and Taxable Brokerage Accounts.

These are taxable accounts because you pay taxes on any taxable income you earn on the money you save in these accounts — whether interest, dividends, or capital gains — in the year you receive it. For example, if you have $10,000 in a savings account and receive $500 in interest on it during 2024, then you will pay taxes on that $500 for 2024.

Even though taxable accounts don’t offer any special tax benefits, they have other features that make them useful:

• No contribution limits. Unlike the tax-advantaged accounts we’ll discuss, there are no limits on how much you can save or invest in taxable accounts.
• No income limits: Unlike a Roth IRA, which is a tax-exempt retirement account we’ll discuss, there are no income restrictions.
• You choose if and when to access your money. In other words, you choose when you take funds out, and you’re not required to start withdrawing your money at a certain age. This is not the case with all tax-advantaged accounts.

Savings Accounts

You can open a savings account at a physical or online bank or credit union. You put your money into the account and earn a certain amount of interest. You can take your money out at any time, although be aware that some places may have a limit on how many monthly withdrawals you make, so check this.

Savings accounts are low risk because most are FDIC or federally insured. So, they can be a good option for your rainy day or emergency fund and shorter-term savings you don’t want to risk.

Things to Be Aware Of:

• The interest rate you earn can vary depending on the financial institution you choose, so shop around. Online high-yield savings accounts may offer a more competitive interest rate.
• The interest you earn is not locked in and can go up or down depending on the interest rate environment and if the central bank changes interest rates.
• As mentioned, you will pay taxes on any interest you earn.
• If the interest you earn is lower than the inflation rate — inflation is the gradual increase we see over time in the prices of goods and services and is measured by the CPI or Consumer Price Index — then over time, your money will lose its purchasing power.

Money Market Accounts

Money market accounts are very similar to savings accounts. You can also open them at banks and credit unions, earn interest that is not locked in but can fluctuate up or down, and they are also low risk, so they are also a good option for your rainy day or emergency fund or shorter term savings you don’t want to risk.

The biggest difference with money market accounts is that you may be able to earn a higher rate of interest, but in return, you may also need to make a higher initial deposit or maintain a certain minimum balance to get that higher interest rate. Also, there may be fees or limits related to the number of monthly withdrawals you can make, so check the rules for your money market account.

Certificates of Deposit (CDs)

Again, like savings and money market accounts, you can find these at banks and credit unions, and they are similarly low risk. The difference with CDs is that you lock in your money for a certain amount of time in exchange for a set interest rate that won’t change during the term you’ve committed to.

So, if you put $1,000 in a 3-year CD that will pay you 5%, then you commit to keeping your money in that CD for three years, and in return, you’ll earn 5% on your money every year for three years. The rate won’t change, and you pay taxes each year based on the interest you earn.

However, if you need to take your money out before the end of the term — in our example, that would be before three years — then you will pay penalties. So, a CD is a good option if you know about a future expense or obligation. For example, if you know you will buy a car in 12 months, the money you have for that car can be put in a 12-month CD to earn interest.

Note that there also exist no-penalty CDs where you can take your money out before the term of your CD is up and not pay penalties. They generally offer a lower rate than a CD where you are locked in, but this is another consideration.

Taxable Brokerage Accounts

A taxable brokerage account is an investment account that you can use to invest in different financial securities, such as stocks or bonds.

These are readily available. You can open a taxable brokerage account with a local financial institution or adviser or online, such as with Vanguard, Charles Schwab, Fidelity, or a robo-advisor like Betterment or Wealthfront, just to name a few.

Depending on which firm you choose, you may manage your investments yourself, get personalized support, or land somewhere in between. Generally, the more personalized the service, the higher the fee, but also, the greater support you get. So shop around and see what option best suits your needs.

Taxable brokerage accounts are good for building long-term wealth beyond tax-advantaged retirement accounts because you can invest in a wide variety of financial securities, and there is no limit to how much you contribute. Depending on your needs and goals, tax-advantaged accounts — due to their limits on how much you can contribute to them each year — may not be enough. You can also take your money out when you choose.

In terms of taxes, you will pay ordinary income taxes on the taxable interest you earn in your account. You will also pay taxes on dividends earned and capital gains realized, but how much you pay will depend on the type of dividend and capital gain. Qualified dividends and long-term capital gains are taxed at lower preferential tax rates — 0%, 15%, or 20%, depending on your income.

A capital gain happens when you sell an investment for more than you bought it for. So, if you bought stock for $1,000 and sold it for $1,500, you would have a $500 gain. The gain is considered long-term if you held the investment for more than a year — so 366 days or more, not 365 days. Then, you get the lower preferential tax rate. If you sold the stock before you held it for more than a year, it would be a short-term gain, and you would pay ordinary income tax rates on the $500.

Qualified dividends, which are dividends from U.S. companies or qualified foreign companies that meet certain IRS criteria, are also taxed at these lower rates. Non-qualified dividends are taxed at ordinary tax rates.

So, taxable brokerage accounts can also give you more tax flexibility when it comes to managing your taxes. For example, if you need money, instead of taking money out of your IRA and paying ordinary income tax rates, you may choose to sell an investment with long-term capital gains and pay the lower preferential tax rate. So, you have more options when and from where to take money to help manage your tax impact.

How risky are taxable brokerage accounts? The level of investment risk you have will depend on what you invest in — the stock, bond, or other financial securities you put your money into — which is up to you.

In terms of the actual firm itself, most brokerage firms in the U.S. are required to have SIPC insurance (Securities Investor Protection Corporation), which covers customers in the case the brokerage firm fails financially.¹ Coverage is up to $500,000 per customer, including up to $250,000 for cash.¹ Note that SIPC insurance does not cover you for market losses or losses you experience from your own investment actions. You can check the institution you’re considering opening your account at to ensure it is a member of SIPC.

TAX-ADVANTAGED ACCOUNTS

Tax-advantaged accounts are designed to help you achieve a specific goal by giving you some kind of tax incentive.

Traditional IRA (Individual Retirement Account)

This is one of the most common accounts used to save for retirement. Key points about a traditional IRA are:

• It is easy to set up an IRA.

For example, you can open an IRA at a bank or other financial institution, such as a brokerage firm or insurance company.

• You need earned income to contribute to an IRA.¹

To contribute to an IRA, you need to have earned income — so it can’t be passive income but income earned, such as from wages, salaries, commissions, tips, bonuses, or net income from self-employment.¹

However, there are Spousal IRAs, which is an IRA that is set up in the name of a non-working spouse. With a spousal IRA, the non-working spouse can contribute to their account based on their working spouse’s earned income.¹ To be able to do this, you and your spouse need to file a joint tax return, and the amount of your combined contributions can’t be more than the taxable earnings reported on your return (or the IRA contribution limits, whichever is less).¹

• Money you put into the IRA, called contributions, may reduce your taxable income.¹

Let’s say you contribute $5,000 to your IRA, then at year end you can deduct $5,000 from your taxable income assuming you are eligible to take the deduction.

Note that while anyone can contribute to an IRA, whether or not you can deduct your contribution depends on if you or your spouse are active participants in a workplace retirement plan, such as a 401(k) plan, and if you are, then your income level.¹

If you are covered by a retirement plan at work, use the following table from the IRS to determine if and how much you can deduct:

If you are not covered by a retirement plan at work or if your spouse is covered by a retirement plan at work, use the following table from the IRS to determine if and how much you can deduct:

• There is a maximum amount of money you can contribute to your IRA each year.

This can change from year to year, but, for example, for 2024 and 2025, the maximum contribution is $7,000 for people under 50 and $8,000 for people who are 50 and older.¹

• Any income earned on investments that you hold in your IRA grows tax-deferred.¹

So, let’s say you invested your IRA funds into bond or stock funds and have earned interest, dividends, and/or capital gains. Your earnings are not taxed but instead continue to grow tax-deferred. You pay taxes when you withdraw the money in retirement. At that point in time, you pay ordinary income taxes on the amount of your withdrawal.

• You generally have to be 59 1/2 to withdraw money from your IRA or you will have to pay a 10% penalty.¹
• Required Minimum Distributions (RMDs) start at age 73. (This age will increase to 75 starting in 2033).¹

Once you hit the age at which RMDs begin, then that year and subsequent years, you are required to take out a certain amount of money from your IRA. The amount of money you need to take out each year will depend on the prior year end balance of your IRA divided by a life expectancy factor that the IRS publishes. If you don’t take your RMD, the IRS can impose a 25% tax penalty¹, which is something you want to avoid. So, be sure to take your RMDs.

Bottom line: Traditional IRAs can be a powerful tool in your retirement savings strategy. Because your money grows tax-deferred until you take it out, IRAs offer you one more option when it comes to managing your taxes before and in retirement and can be especially beneficial when you think you will be in a lower tax bracket in retirement than you currently are.

Roth IRAs

Another form of the individual retirement account is the Roth IRA, which is a tax-exempt account. What is similar to a traditional IRA is that you need earned income to contribute.¹ There is the same maximum that you can contribute — again, this can change year to year but is $7,000 in 2024 or $8,000 for people 50 and older, and **the contribution limit applies to both traditional and Roth IRAs combined.**¹ In other words, you can’t put $7,000 in a traditional IRA and $7,000 in a Roth; you can only put a maximum of $7,000 across both accounts.

Here are some things that are different about Roth IRAs vs. traditional IRAs:

• You contribute money after taxes. Therefore, there is no tax deduction in the year of your contribution. However, in return, your earnings on investments grow tax-free and will not be taxed again when you withdraw them, as long as you are at least 59 1/2 years of age and your Roth IRA account is at least five years old.¹ If you don’t meet those criteria, you will pay income taxes and a 10% penalty on your earnings.¹
• Money you directly contribute to your IRA can be taken out at any time tax and penalty-free, which is a benefit of a Roth.¹ You still have access to the money you contribute. Note that this does not apply to Roth conversions, only direct contributions.¹
• There are no RMDs or Required Minimum Distributions.¹
• There are income limits, however. For example, as of 2024, to be able to contribute directly to a Roth IRA, your Modified Adjusted Gross income needs to be under $146,000 if you’re a single filer and $230,000 if you’re married filing your taxes jointly.¹ Be aware that this amount can change from year to year, so check it.

Note that while you may not be able to directly contribute to a Roth IRA, it is possible to do Roth conversions, where you move money from your traditional IRA to your Roth IRA. However, any money converted is considered taxable income in the year that you convert it, so be aware of the tax implications before you convert.¹

Bottom line: A Roth IRA is another powerful tool in your retirement savings strategy. It offers you greater flexibility when it comes to managing your taxes and can be especially beneficial if you think you will be in a higher tax bracket in retirement than you are currently.

Employer-Sponsored Retirement Accounts

Employer-sponsored retirement accounts include accounts such as a 401(k), 403(b), and 457 plans. We’ll focus on 401(k) plans here. Some key points about 401k accounts are as follows:

• You set one up through your employer.
• Pre-tax contributions reduce your taxable income.¹

For example, you can set up automatic salary deferrals where you have money automatically deducted from your salary and invested into your 401(k) before you pay taxes on it, which reduces your taxable income. So, if you put $1,000 into your 401k each month before taxes, then at the end of the year, you will have reduced your taxable income by $12,000 ($1,000 x 12 months).

• There are contribution limits, but they are higher than the contribution limits for IRAs.

Again, these can change from year to year, but for example, in 2024, the maximum contribution amount is $23,000, with an additional $7,500 catch-up contribution allowed for people 50 or older.¹ Note that as of 2025, individuals 60–63 years of age will be able to make even larger catch-up contributions — to either $10,000 or 50 percent more than the regular catch-up contribution limit, whichever is greater — so, head’s up if that is you.¹

• Any income earned on investments that you hold in your 401(k) grow tax-deferred, the same as with a traditional IRA.¹
• You generally have to be 59 1/2 to withdraw money from your 401(k), or you will have to pay a 10% penalty.¹
• Similar to IRAs, there are Required Minimum Distributions (RMDs) for a 401k that also start at age 73 (or 75 starting in 2033).¹
• Unlike an IRA, however, many employers offer matching contributions.

This is FREE money and can make a significant difference in how much money you are able to save. For example, if your employer offers a match of 50% up to 6% of your salary, you earn $100,000, and you contribute at least 6% of your salary, or $6,000, then your employer will contribute on your behalf $3,000. That is $3,000 more money that you saved.

• The potential downside of a 401k is that there may be more limited investment options.
• Last but not least, many employers also offer a tax exempt version of their retirement plan, so a Roth 401(k), Roth 403(b), or Roth 457, which work much like a Roth IRA in terms of taxes but have even higher contribution limits. So, if having greater flexibility to manage your taxes in retirement is important to you or if you think you will be in a higher tax bracket in retirement than you are now, definitely check into what tax-exempt retirement plan options your employer offers.

What if you are self-employed?

In addition to an IRA, there are other self-employed retirement account options available, such as a solo 401(k), SEP IRA, and SIMPLE IRA — and these also have Roth versions, too — and these all have greater contribution amounts than an IRA. So, if you are self-employed and want to amp up your savings, then check these out.

Health Savings Account (HSA)

Another powerful account that’s not retirement-focused and so may be overlooked is the Health Savings Account, or HSA. Why are these so powerful? They have a triple tax benefit.

However, you can only open an HSA if you have a high-deductible health plan, and for 2024, that means you have a health insurance plan with a deductible of at least $1,600 for an individual or $3,200 for a family.¹ For 2025, that goes up to a deductible of at least $1,650 for an individual and $3,300 for a family.¹ There are also limits on the MOOP or Maximum out-of-pocket amount.¹ The definition of what qualifies as a high deductible health plan can change each year, so be aware and check them out.

So, let’s talk about the triple tax advantage that HSAs give you:

1. Your contributions are tax-deductible.¹ This reduces your taxable income and, thus, your taxes. Note that the contribution limit can change from year to year, but for 2024, it is $4,150 for an individual and $8,300 for a family. In 2025, this will be $4,300 for self-only coverage and $8,550 for family coverage, with a catch-up contribution of $1,000 for those 55 and older. Note that there is a limit to how long you can contribute to an HSA, specifically, you need to stop contributing to an HSA six months before you retire or get Medicare benefits.
2. Money in the HSA can be invested, and your investments grow tax-free (although investment options can vary by HSA provider, so be sure to shop around to ensure you get access to the investment options you desire).¹
3. Withdrawals from your HSA are tax-free as long as you use the money for qualified medical expenses.¹

Qualified medical expenses include the following:¹

• Deductibles, copayments, and coinsurance;
• Prescription medications
• Dental and vision care
• Chiropractor visits
• Acupuncture
• Mental health counseling
• And much more!

So, an HSA offers you a tax exempt haven for your investments to grow and when you take money out from it as long as you use that money for a qualified medical expense. This can be a great tool to use not just for current healthcare expenses but for future ones, which is important since our healthcare costs tend to be greater the older we are.

Also, there is no deadline for when you need to use the money in your HSA. Plus, you can reimburse yourself tax-free for past medical expenses at any time in the future, as long as the qualified medical expense you’re claiming happened after you opened your HSA.¹ So, be sure to keep all your receipts for HSA-eligible expenses, even if you don’t reimburse yourself immediately from your HSA.

Last but not least, after age 65, you can also use your HSA funds for non-medical expenses.¹ If you take money out for non-medical needs, it will be taxed as ordinary income, similar to an IRA, but there won’t be any penalty. That provides added flexibility if you’re worried about not using all the money in your HSA (and if you don’t want to leave your HSA to a beneficiary). In the meantime, any money in your account grows tax-free.

Bottom line: HSAs can be a powerful tool for those with a high deductible health plan.

Where do you open an HSA? There are many places: Banks, insurance companies, and brokerage firms. Be sure to compare options because investment choices and tools can vary by provider.

Note: I won’t go into detail here, but be aware that your employer may also offer flexible spending accounts or FSAs where you can save for daycare and health expenses. Like an HSA, contributions are taken out of your salary before taxes, and money used for a qualified expense won’t be taxed.¹ Unlike an HSA, however, FSA funds can’t be invested, and there is a deadline by when you have to use or lose the money in the fund.¹ However, they can be great tools because, like an HSA, you’re not paying taxes on the money you put into the FSA, so you have more money to pay for expenses. Get more information about FSAs that you might have access to from your employer.

529 College Savings Plans

Last but not least, let’s talk about 529 plans, which are specifically designed for saving for education expenses. Generally, we might think of 529s for university, but they can also help cover tuition expenses for K through 12 public, private, or religious school attendance.¹

With a 529 plan, contributions are not tax-deductible at the federal level (your state may offer you special benefits, however).¹ However, there is no federal limit on how much you can contribute to a 529, and state limits can be well into the six figures.¹ Plus, investments inside the 529 grow tax-free, and withdrawals are tax-free as long as they’re used for qualified education expenses, like tuition, books, and even some room and board costs.¹

What if you don’t use all the 529 funds? You have options. For example, you can:¹

• Transfer funds to another beneficiary
• Use the funds to make student loan payments
• Rollover up to $35,000 to a Roth IRA retirement account

Although less tax effective, you can also choose to pay taxes and a 10% penalty on money withdrawn and use it for something else.¹ There may be certain stipulations to be aware of depending on which option you choose, but the point is that the money is not stuck if you don’t use it.¹

There are many places you can start a 529 plan. For example, banks, brokerage firms, and states may offer their residents 529 plans (along with added tax incentives or other benefits). So, shop around and compare plans since benefits and costs can vary.

Final note: In addition to traditional 529 plans, some states and private colleges also offer 529 prepaid tuition plans.¹ These are typically less flexible than 529 savings plans, but if you’re sure of the institution your child will attend, want to avoid investing, and instead lock in current tuition rates, then this might be an option to consider.¹

FINAL THOUGHTS

As you consider which account to use, think about the following:

• Your Financial Goals: Are you saving for retirement, a down payment on a house, or your child’s education? What it is the time horizon of your goal? Your goal and when you need access to your savings will help determine which account is the best fit.
• Your tax situation: If you’re in a higher tax bracket now and expect to be in a lower bracket in retirement, contributing to a Traditional IRA or 401(k) could help reduce your tax burden today. On the other hand, if you’re in a lower tax bracket now but expect to be in a higher one later, a Roth option might be a better choice because you’ll pay taxes upfront at a lower rate and enjoy tax-free withdrawals in retirement. If you are not sure of what your tax situation will be in the future or want to have flexibility in managing your taxes, then having a mix of taxable and tax-advantaged accounts may best serve your needs.
• Your Options: Anyone can open a taxable account, but your tax-advantaged account options will depend on your unique situation. However, if you do have access to an employer-sponsored retirement plan that offers a company match, which is free money, do take advantage of that if you can because the more money someone else saves on your behalf, the less money you need to save.

Then, get started saving. The sooner you start saving for your goals, the better off you’ll be, and the more options you’ll have down the road. So, start saving and be consistent because consistency is the key to achieving any goal.