Money you have today is more valuable than money in the future because you can invest it to earn profit over time. The stock market is often considered the best place to invest money for creating wealth long term, but there are many ways to invest in stocks. Making use of tax-advantaged investment accounts is the best way to invest since avoiding taxes allows money to grow more quickly.
A 401k plan is a type of employer-sponsored retirement account. The money you commit to a 401k plan can be invested in a variety of underlying assets such as stocks and mutual funds. Investing with a 401k plan is preferable to investing on your own because the money you save in the plan is tax-deferred. This means you do not pay taxes on the income you save in a 401k until you ultimately withdraw it during retirement. In addition, many employers offer contribution matching, which means they will make deposits into your account on your behalf based on the amount you save.
Individual Retirement Accounts
Individual retirement accounts (IRAs) are investment accounts that work similar to 401k plans in that the money you contribute to a plan may be invested in underlying assets like stocks and contributions may be tax deductible. IRAs differ from 401k plans in that workers may open them privately. This makes IRAs an important alternative for people without access to 401k plans.
A Roth IRA is a special type of IRA that offers different tax advantages than a traditional IRA. With a Roth IRA, the money you put into the account is not tax deductible, but you do not have to pay taxes on gains you earn from investments in the account and you don't have to pay income taxes when you withdraw the funds during retirement. Traditional IRAs are subject to mandatory withdrawals, called required minimum distributions, beginning at age 70 1/2. There are no such withdrawal requirements for a Roth IRA.
Health Savings Accounts
A health savings account (HSA) is an investment account available to people with high-deductible health insurance plans. According to the Internal Revenue Service, in order to qualify for an HSA, your health insurance plan must have a deductible of at least $1,200 for single coverage and $2,400 for family coverage. The money you save in an HSA can be invested in underlying assets like stocks and contributions are tax deductible like 401k and IRA contributions. If you spend HSA money to cover medical expenses, you do not have to pay income tax on withdrawals.
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.