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7 Financial Accounts You Need for a Richer Life

A key to growing rich is having the right financial accounts in place. Get the scoop on seven accounts that most individuals and families should have for more financial success.

By
Laura Adams, MBA,
Episode #551
7 Financial Accounts You Need for a Richer Life

5. Brokerage account

A podcast listener named Natasha C. says, “It seems like life can throw so much your way and it would make sense to invest in a non-retirement account so you don’t have to pay an early withdrawal penalty if you need the money for an emergency. Do you think there’s any benefit to investing without using a retirement account?

Thanks for your question, Natasha. Retirement accounts penalize you for taking early withdrawals so you won’t touch it until retirement. However, if you don’t like that consequence, consider using a Roth IRA. Your after-tax contributions (but not earnings) can be withdrawn at any time with no penalty.

My recommendation is to max out at least one retirement account every year and to also have emergency savings in the bank. If you accomplish those key financial goals and still have more to invest, use a regular investing or brokerage account.

You can contribute an unlimited amount each year to a brokerage and withdraw money at any time without penalty. The downside to a brokerage is that you’ll owe tax each year on your account gains.

Not getting any tax breaks doesn’t make using a brokerage a bad idea. It’s simply less tax-efficient and more expensive compared to the benefits you get from investing through a retirement account.

See also: A 5-Point Checklist for How to Invest Money Wisely

6. Health savings account (HSA)

An HSA is a special account that allows you to pay qualified medical expenses on a pre-tax basis. To be eligible for this account, you must first be enrolled in an HSA-qualified high deductible health plan (purchased on your own or through an employer).  

Health insurance with a high deductible reduces the monthly premium, and therefore has become more popular. But these plans aren’t the right choice for everyone. They work best when you're in relatively good health and aren't likely to spend the full deductible each year.

The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions. Your savings can earn interest or grow in investments, such as mutual funds. And distributions of contributions and earnings are completely tax-free, if you spend them on qualified, unreimbursed medical expenses.

Depending on your income tax rate, using an HSA could give you a 20% to 30% discount on medical expenses. They include a wide range of costs you might incur until you meet your annual deductible, or that simply aren’t covered by your health plan, such as doctor visits, dental checkups, prescription glasses, and prescription drugs.

Just like with a retirement account, you should never put money in an HSA that you might need for everyday expenses. Withdrawals spent on non-qualified expenses are subject to income tax plus a hefty 20% penalty.

There’s no income limit to have an HSA, but there are annual contribution limits. For 2018, you can contribute a total of up to $3,450 to an HSA when you have insurance just for yourself, or $6,900 if you have a family plan. And if you’re age 55 or older you can contribute an additional $1,000.

You can make tax-deductible contributions at any time during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA or to spend it.

Additionally, after your 65th birthday, you can spend HSA funds any way you like. If you use them for non-qualified expenses, such as everyday living expenses or travel, you’d owe ordinary income tax, but skip the 20% penalty.

In other words, an HSA that you keep long enough will eventually mimic a traditional retirement account. That’s a great reason to max it out every year, even if you don’t expect many medical expenses.

If you qualify for an HSA, they're available at many banks, credit unions, brokerages, and specialty institutions. Most are convenient to use and offer paper checks, a debit card, and online banking. Use the HSA Cheat Sheet to learn more and find the best places to open your account.

7. 529 college savings account

A 529 plan is a tax-advantaged account that allows you to save and invest for education expenses. Its name comes from Section 529 of the Internal Revenue Code, which regulates them.

You make contributions that can be withdrawn tax-free to pay for qualified education expenses for you, a child, or another member of your family. The funds can be spent at most accredited institutions, such as colleges, universities, graduate schools, vocational schools, and even some foreign schools.

You allocate 529 funds in a variety of investment options and earnings are exempt from tax, when used for qualified expenses. These might include tuition, room and board, books, fees, and equipment. Starting in 2018, you can spend up to $10,000 per year tax-free on education expenses for a younger child who attends a public or private school.

The funds in a 529 plan belong to the owner and can only have one designated beneficiary who is (or will be) the student and has a Social Security number. If you want to save for more than one child, you generally must open an account for each of them. However, you can generally change a 529 beneficiary to another member of the family in the same generation without triggering tax consequences.

Most states offer at least one 529 plan and may provide a state income tax deduction or credit for your contributions. However, 529 contributions can’t be deducted from federal income taxes.

Everyone can use a 529 plan because there’s no income limit, age limit, or annual contribution limit. Depending on the plan, there may be lifetime contribution limits; however, many plans allow you to rack up more than six figures per student. An added benefit is that qualified withdrawals don’t get factored as income in the calculation for financial aid.

Just remember that if you spend 529 funds on non-qualified expenses, you’ll be subject to income tax, plus a 10% penalty, on the earnings portion. So, don’t save more than you believe you’ll need to spend on the total cost of education.

To sign up for a 529 you can go directly to the plan’s website or use a financial advisor. Set up automatic contributions from your bank account or direct deposits from your paycheck.

No matter if you contribute $10 a month or $1,000 a month to a 529 plan, the sooner you get started, the easier it will be for you and your family to pay for college.

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