Types of Investment Accounts

Cincinnati financial planning

Investment and Savings Accounts

What type of financial account do you have, and do you understand its tax consequences?

 

During client meetings we are often asked to explain what the differences are between various types of accounts, as well as how they are taxed. Read to learn more about employer plans, IRA’s, college savings and health savings accounts.  Detailed in this blog are the different contribution limits, qualified penalty-free withdrawal rules, and much more.  This is not an exhaustive summary, however for those starting out, this summary contains some basic financial information.

Employer Sponsored Retirement Plan 
    • Funded with pre-tax employee and employer (if there is a match) elective deferrals
    • Maximum contribution amount in 2024 is $23,000 with $7,500 catch-up for those age 50+
    • Upon separation of service from a company it can be rolled into an individual IRA or another employer plan if new plan allows
    • Penalty free withdrawals can be made at age 59 ½ or in some cases age 55
    • Withdrawals are subject to ordinary income tax rules
Traditional IRA
    • Funded with contributions
    • Contributions eligible for tax deduction, but subject to phaseout based on income
    • Contribution limit in 2024 is $7,000 with $1,000 catch-up for those age 50+
    • Withdrawals received after age 59 ½ are taxed as ordinary income
Roth IRA
    • Funded with after-tax contributions
    • Contribution limit in 2024 is $7,000 with $1,000 catch-up for those age 50+
    • Subject to income limits
    • Qualified withdrawals are tax-free if certain conditions met
    • Some withdrawal exceptions are allowed penalty – free
Health Savings Account (HSA)
    • Set up if enrolled in a High Deductible Health Plan (HDHP)
    • Contributions are tax-deductible
    • Contribution limits in 2024 are $4,150 for single and $8,350 for family with $1,000 catch-up for those age 55+
    • Withdrawals for qualified medical expenses (doctor, dentist, vision, or prescriptions) are tax-free at any time
    • Funds can be invested in stocks, bonds, or mutual funds to grow until needed
 After-tax brokerage account
    • Funded with after-tax funds
    • No tax deductions for contributions
    • Investments sold above original cost basis are subject to short- or long-term capital gains tax rates
    • Dividends and interest are taxed as ordinary income
    • No restrictions as to when or how funds can be used
529 College Savings Plan
    • Funded with after-tax funds
    • State income tax credits or deductions may be available in many states
    • No income restrictions apply, anyone can add funds
    • Invested for growth and earnings grow tax-free
    • Withdrawals which are used for qualified educational expenses are tax-free
    • Excess funds can be held until another family member needs them
    • If used for non-qualified expenses, the earnings portion is subject to 10% federal penalty tax

Each person’s situation is unique, and we are here to answer your questions. One of WPC’s core commitments is to guide the next generation. We are here to help you make sound financial decisions and build a foundation for financial success.

Check out our Personal Finance Best Practices Checklist for beginning investors and other resources at www.wealthp.com   If you would like to work with a Nex Gen Advisor, give us a call at 513-733-1750.  Tim Dougherty, CFP® and Noah Sayre, CFP® are available to discuss your financial situation.

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