Choosing The Right Gap Account For Your Investments

When it comes to investing, there are many options to choose from, each with its own advantages and considerations. From safe choices like high-yield savings accounts and CDs to riskier options such as stock index funds, the right investment account depends on your financial goals, risk tolerance, and time horizon. Here are some key factors to consider when deciding which gap account to use for your investments:

- Risk and return: There is typically a trade-off between risk and return in investing. If you're comfortable with higher risk for potentially higher returns, you might consider stock index funds or even individual stocks. On the other hand, if you prefer lower-risk options, high-yield savings accounts, CDs, or government bond funds might be more suitable.

- Time horizon: The time frame over which you plan to invest affects the suitability of different investment options. For short-term goals, safer investments like savings accounts and CDs are generally recommended. For long-term goals, you can consider riskier options like stocks, as you have more time to ride out market fluctuations.

- Diversification: Diversifying your investments across different asset classes and industries can help reduce risk. Index funds, mutual funds, and ETFs offer built-in diversification by pooling multiple investments into a single fund.

- Fees and expenses: Different investment options come with varying fees and expenses. For example, mutual funds may charge commissions or require a minimum purchase amount, while ETFs are often commission-free and have no minimum purchase requirement.

- Tax implications: Consider the tax implications of different investment options. For example, interest earned on savings accounts and CDs is generally taxable, while some investments, like Roth IRAs, offer tax advantages.

- Liquidity: Some investments are more liquid than others, meaning you can easily convert them to cash. For example, stocks and ETFs can usually be bought and sold quickly, while real estate investments may take longer to sell.

Standard brokerage accounts

A standard brokerage account is a taxable investment account that provides access to a broad range of investments, including stocks, mutual funds, bonds, exchange-traded funds, and more. These accounts are held at a licensed brokerage firm, and the broker executes orders for investments on behalf of the investor.

There are two main types of standard brokerage accounts: cash accounts and margin accounts. A cash account is the most basic type, allowing you to buy investments using the money deposited into the account. On the other hand, a margin account allows you to borrow additional funds from your broker to make larger and more advanced trades, such as short-selling.

One of the key advantages of standard brokerage accounts is the flexibility they offer. There are no limits on how much you can contribute or withdraw from these accounts, and you can invest in any securities offered by your brokerage. However, this flexibility comes at the cost of tax benefits, as any interest, dividends, or gains on investments are subject to taxes in the year they are received.

When choosing a standard brokerage account, investors should consider their financial and investment needs and select a firm that aligns with their goals and preferences. Some investors may prefer full-service brokerage firms that provide advisory services, while others may opt for discount brokerage firms or online brokers that charge lower fees.

Retirement accounts

Traditional IRA

Anyone with earned income can contribute to a traditional IRA. This type of account offers significant tax breaks, as contributions are made with pre-tax dollars, meaning they are not considered taxable income. Investments in the account grow tax-free until withdrawal, at which point they become taxable. There are also high contribution limits, allowing individuals to save up to $7,000 in 2024 and 2025 ($8,000 for those aged 50 and above). However, early withdrawals may result in additional taxes and penalties.

Roth IRA

The Roth IRA is a newer version of the traditional IRA, offering substantial tax benefits. Contributions are made with after-tax money, and neither contributions nor earnings are taxed upon withdrawal in retirement. There are no taxes or penalties for withdrawing contributions (but not earnings) at any time. However, there are income limits for contributing to a Roth IRA.

K)

The 401(k) is one of the most common types of retirement plans offered by employers. It allows employees to contribute pre-tax wages, which grow tax-free until withdrawal at retirement. Many employers also offer matching contributions, providing an immediate return on savings. The employee contribution limit for 2024 is $23,000 ($30,500 for those aged 50 and over). However, accessing funds early may result in penalties.

B)

The 403(b) is similar to the 401(k) but is offered by public schools, charities, and some churches. It also allows employees to contribute pre-tax money, which grows tax-free until retirement. Some employers may offer matching contributions. The contribution limit for 2020 and 2021 is $19,500 ($26,000 for those aged 50 and over). Early withdrawals may be subject to additional taxes and penalties.

SIMPLE IRA

The SIMPLE IRA is designed for small businesses that don't have other retirement plan options. Employers are required to contribute to employee retirement accounts. Employees can contribute up to $16,000 in 2024. This type of account doesn't require much regulation and is easy to set up.

Spousal IRA

The spousal IRA allows the spouse of a worker with earned income to fund their own IRA. The working spouse's taxable income must be more than the contributions made to any IRAs. The spousal IRA can be either a traditional or Roth IRA. This type of account allows a non-working spouse to take advantage of the benefits of an IRA.

These are just a few examples of the retirement account options available. Each has its own set of advantages, eligibility requirements, and contribution limits. It's important to carefully consider your own financial situation and goals when choosing a retirement account.

Investment accounts for kids

There are several investment accounts that can be opened for children, each with its own unique features and benefits. Here are some of the most common types:

Custodial Brokerage Account

A custodial brokerage account is a great way to introduce children to the world of investing. This type of account is set up by an adult for the benefit of a minor and can be established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). The adult acts as a custodian and maintains control over the account until the child reaches the "age of majority," which is typically between 18 and 21, depending on state laws. The main difference between UGMA and UTMA accounts lies in the type of assets that can be contributed. While both accounts allow for investments such as cash, stocks, bonds, and mutual funds, UTMA accounts can also hold real estate. It's important to note that once the money is deposited into a custodial account, it cannot be transferred to another beneficiary.

Roth IRA for Kids

A Roth IRA is a type of retirement account that can be opened for children with earned income, such as income from babysitting, mowing lawns, or a part-time job. The adult acts as a custodian until the child reaches the age of majority. The main advantage of a Roth IRA is that contributions can be withdrawn at any time without incurring income taxes, and investment earnings can be withdrawn tax-free for certain purposes, such as a first-home purchase or higher education expenses.

529 College Savings Plan

The 529 plan is a tax-advantaged account specifically designed for saving for a child's education. Investments in this account grow tax-free, and withdrawals are federal income tax-free as long as they are used for qualified education expenses, including textbooks, tuition, and room and board. There are no annual contribution limits, but there is an overall contribution cap that varies by plan.

ABLE Account

The Attainable Savings Plan, or ABLE account, is similar to a 529 plan but is designed for individuals with disabilities. This account allows individuals with disabilities to save money and wages without losing access to public benefits such as Supplemental Security Income (SSI). Contributions grow tax-free, and withdrawals are tax-free when used for qualified disability expenses. The account owner can be the eligible individual or a designated beneficiary, and a person with signature authority must be designated if the account owner is a minor.

High-Yield Savings Account

While not technically an investment account, a high-yield savings account can be an excellent tool for teaching children about budgeting, saving, and short-term money management. These accounts, often offered by online banks and credit unions, pay higher interest rates than traditional savings accounts, providing a safe and insured spot for children to build an emergency fund.

Education accounts

529 Plans:

529 plans are one of the most common education investment accounts and they offer several benefits, including tax advantages. 529 plans are administered on a state-by-state basis, and each state has different rules. For example, some states allow you to deduct a certain amount from your taxes if you contribute to a 529 plan. There are no set contribution limits, and you can contribute up to $529,000 per year. The funds in a 529 plan can be used for a broad range of qualified educational expenses, including tuition, books, supplies, and student housing. It's important to note that if you withdraw money from a 529 plan and don't use it for qualified expenses, you may have to pay taxes and a penalty.

Coverdell Education Savings Account (ESA):

Coverdell ESAs are similar to 529 plans in that they offer tax-free investment growth for educational expenses. However, Coverdell ESAs have a low annual contribution limit of $2,000, and the funds must be used before the beneficiary turns 30, or taxes and penalties may apply. Coverdell ESAs can be used for a wider variety of expenses, including private high school tuition, academic tutoring, and special needs services.

UGMA and UTMA Custodial Accounts:

These accounts are essentially trusts that hold assets during your beneficiary's childhood. UGMA accounts hold paper assets such as stocks or mutual funds, while UTMA accounts can also own real estate. The main advantage of these accounts is the ability to set up trusts without a lawyer, ensuring that the beneficiary cannot access funds prematurely. However, UGMA and UTMA accounts do not offer significant tax advantages. The first $1,050 of earnings is tax-free, the next $1,050 is taxed at the child's low tax rate, and earnings above $2,100 are taxed at the parent's tax rate.

Roth IRAs:

While Roth IRAs are typically used for retirement savings, they can also be powerful tools for educational planning. Roth IRAs offer tax-free growth if you've had the account for at least five years, and you can access your contributions without taxes or penalties. If you're under 59.5 years old, you can withdraw up to $10,000 penalty-free once in your lifetime to pay for higher education expenses. However, Roth IRAs have a low annual contribution limit of $6,000 if you're under 50 and $7,000 if you're 50 or older. Withdrawals from a Roth IRA are considered income, which can reduce potential financial aid packages.

When choosing an education investment account, it's important to consider your savings goals, eligibility, and the level of control you want to have over the account. Each type of account has its own set of benefits and restrictions, so be sure to do your research and choose the one that best fits your needs.

High-yield savings accounts

• BrioDirect: 4.85% APY
• EverBank: 4.75% APY
• LendingClub Bank: 4.75% APY
• Bread Savings: 4.75% APY
• Bask Bank: 4.65% APY
• Popular Direct: 4.60% APY
• CIT Bank: 4.55% APY
• TAB Bank: 4.52% APY
• CIBC Bank USA: 4.51% APY
• UFB Direct: 4.31% APY

When choosing a high-yield savings account, consider the APY, monthly fees, minimum balance requirements, and withdrawal limits. It is also important to pick an account that meets your overall banking needs, such as having both checking and savings accounts at the same bank.

Frequently asked questions