Investing

In general, you should save money in the following accounts in order:

1. 401k, 403b, or thrift savings
2. Traditional or Roth IRA (up to IRS limit)
3. Investing account
4. High-yield Savings, Cash account, or CD
5. Checking account

• 1-3 will be tax-advantaged (either tax-free or tax-deferred) since they are retirement accounts
• 4-6 will not be tax-advantaged

401(k)/403(b)

A 401(k) or 403(b) is an employer-sponsored retirement plan.
That means, it is managed by a company cooperating with your employer.
If you work for a for-profit company, you will have a 401k. If you work for a public school or non-profit company, you get a 403b.
If you work for the federal government, you will have a thrift savings plan.
For the most part, 401k and 403b rules are identical.

• Employees can contribute up to $19,500 for 2020 ($19,000 in 2019) [1]
  • These are called "elective deferrals" which are tax-deferred. You may also contribute after-tax deferrals subject to the total maximum contribution below.
• In total, you can add up to $57,000 to your 401k each year, or up to 100% of your income, whichever is lower. This includes both your contributions and your employer's contributions

Individual Retirement Account (IRA)

A tax-advantaged retirement account you can control.
The IRS allows you to deposit up to $6000 ($7000 if 50 or older) per year or up to your income, whichever is lower. Note that this limit is for all your IRAs combined. Typically, you should save in a Roth IRA unless you surpass the income limit. If you're not eligible for the Roth IRA, you may consider the backdoor Roth IRA.

Traditional IRA

In a traditional IRA, you deposit pre-tax money (see notes). Thus, your deposit counts as a tax-deduction. You pay taxes when you withdraw your money.

Notes

• Early withdraws (before age 59.5) are subject to a 10% penalty plus taxes
• You must start taking required minimum distributions (RMDs) at age 72
• No more contributions after age 70.5
• While there are no income limits to contributing to a traditional IRA, there are income limits to deducting from your taxes
  • See IRA Deduction Limits
  • To avoid being double taxed on your Traditional IRA contributions, be sure to complete IRS Form 8606

Roth IRA

In a Roth IRA, you deposit post-tax money. However, your money grows tax-free.
There is an income limit to the Roth IRA of $124,000 in 2020.

Notes

• No required minimum distributions on your own Roth IRAs
  • There are RMDs on inherited Roth IRAs
• You can withdraw your contributions (but not earnings) without penalty
  • Note that any further contributions will count towards your annual limit so you cannot "borrow" from your Roth IRA.
• No age limits on contributions

Backdoor Roth IRA

If you are a high-earner and believe you will earn more money in retirement, you may want to do a backdoor Roth IRA to grow your retirement account tax-free rather than tax-deferred.

Basic Idea

• Contribute to a traditional IRA
• Convert the traditional IRA into a Roth IRA

Notes

• To avoid tax complications, you should eliminate all other pre-tax IRAs beforehand by rolling them over to a 401k. Otherwise, you will be subject to the pro-rata rule.

Mega Backdoor Roth

Requirements: Your 401k allows after-tax contributions and non-hardship withdrawals.

Basic Idea

• Max out after-tax contributions to your 401k
• Rollover or withdraw the after-tax portion to a Roth IRA or Roth 401K

ETFs

Main article: Exchange-traded fund

Exchange-traded funds. Typically these will have a fee called an expense ratio.
The expense ratio is measured in basis points.
25 basis points is an annual fee of 0.25%.

Brokerages

Wealthfront

Main article: Wealthfront

Referral

Cash Account

Wealthfront offers a cash account. This account is distributed between up to several banks so it is FDIC Insured up to $3 million .