Investing Basics

Retirement Accounts

401(k): These are retirement accounts that are attached to an employer. The most common types of 401(k) accounts:

Pre-Tax 401(k): This is generally what people refer to when they say 401(k) account. They have tax-preferential treatment since you don't pay any taxes on them when you contribute into them. The tax payer does eventually come calling because you will get taxed on your contributions (as well as any gains) when you withdraw from this account

Roth 401(k): With this type of 401(k) account, you make contributions with after-tax money so the contributions do not get any tax-preferential treatment. However, when you withdraw from them, both the contributions and the gains do not get taxed as long as you satisfy 2 rules: a) you are 59.5 or older and b) you have had the Roth account for atleast 5 years 

• Individual Retirement Account (IRA): this is linked to an individual as opposed to an employer
• Traditional IRA: 
• Contribution limit : $7,000 for those under age 50, and $8,000 for age 50 or older
• Income Limit: None
• Roth IRA
• Contribution Limit (for 2024)
  
  

  Type of filing	Modified adjusted gross income (MAGI)	Contribution Limit
  Single	<$146,000	$7,000
  	≥ $146,000 but <$161,000	Partial
  	≥ $161,000	Cannot contribute*
  Married filing jointly	< $230,000	$7,000
  	≥ $230,000 but <$240,000	Partial
  	≥ $240,000	Cannot contribute*

*There is an advanced strategy that allows high income earners to contribute to Roth IRA. For details on how to do this, please refer to this article

Non-Retirement Accounts

• Brokerage account : this type of account does not get preferential tax treatment. Examples of companies where you can have a brokerage account are Fidelity, Vanguard, E*TRADE

Fixed Income Accounts

• Certificate of Deposit (CD)
• Regular : This has a fixed term and a fixed interest rate also known as APY. There is typically a penalty for pre-maturely withdrawing your money
• No Penalty : This type of CD does not have a penalty for withdrawing before the maturity date. The tradeoff is that generally it offers a slightly lower interest rate or APY than a regular CD
• Brokerage CDs: Unlike regular CDs which are offered by traditional banks, these are special type of CDs that are offered by brokerage companies like Fidelity, Schwab etc
• Bonds
• Treasury Bonds
• Corporate Bonds
• T-bills
• Municipal Bonds

For information on how these various types of accounts are treated from a tax perspective, check out this post