Building wealth requires a thoughtful approach to investing. While many options exist, certain investment vehicles consistently prove valuable for most individuals. According to financial advisor Christopher Stroup, CFP, owning a blend of these five types of accounts can help you create a stronger financial foundation and secure your future.
Retirement Savings: 401(k) and Employer-Sponsored Plans
For anyone with access, a 401(k) or similar employer-sponsored retirement plan should be a priority. These accounts offer a significant advantage: tax-deferred growth. This means you don’t pay taxes on the investment gains until you withdraw the money in retirement. Even more beneficial, many employers provide matching contributions, effectively offering “free money” toward your retirement savings. Maximizing your contributions, particularly to capture the full employer match, is a smart strategy to significantly boost your savings.
Tax-Advantaged Growth: Roth IRA
A Roth IRA provides a unique and valuable benefit: tax-free growth and tax-free withdrawals in retirement. Unlike traditional retirement accounts, contributions to a Roth IRA are made with after-tax dollars. This means you won’t receive an immediate tax break, but you’re not taxed on the investment gains you accumulate over time. Stroup suggests this is particularly advantageous for individuals who anticipate being in a higher tax bracket later in life.
Flexible Investing: Brokerage Account
While retirement accounts offer tax advantages, a taxable brokerage account provides greater flexibility. It allows you to invest without the restrictions imposed by retirement accounts, such as withdrawal age limitations. This gives you access to your funds whenever you need them. While you will pay capital gains taxes on profits, a brokerage account is a useful way to build wealth for both long-term goals and for making significant purchases outside of retirement.
Guaranteed Income: Pension Plans
For those fortunate enough to have access, a pension can provide a crucial source of guaranteed retirement income. While fewer employers offer pensions today, they remain valuable because they deliver a predictable income stream during retirement. Pensions can reduce reliance on personal savings, but are often limited to specific sectors, such as government or union jobs.
Short-Term Security: High-Yield Savings Account (HYSA)
A High-Yield Savings Account (HYSA) plays a vital role in protecting your emergency savings and funds needed for short-term goals. While not a traditional investment, a HYSA offers a better interest rate than a standard savings account, helping your cash keep pace with inflation. Having liquid savings is essential for most people, and a HYSA provides a safe and accessible option for low-risk funds.
Accumulating a diverse range of these investment accounts and actively contributing to them is ideal. Even starting with a few of the most impactful options can set you on the path to a more secure financial future.
