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In general, you should save money in the following accounts in order: | |||
# 401k, 403b, or thrift savings (up to employer-match) | |||
# Traditional or Roth IRA (up to IRS limit) | |||
# 401k, 403b (up to IRS limit) | |||
# Investing account | |||
# High-yield Savings, Cash account, or CD | |||
# Checking account | |||
1-3 will be tax-advantaged (either tax-free or tax-deferred) | |||
4-6 will not be tax-advantaged | |||
==Individual Retirement Account (IRA)=== | |||
A tax-advantaged retirement account you can control.<br> | |||
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. | |||
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 | |||
===Roth IRA=== | |||
In a Roth IRA, you deposit post-tax money. However, your money grows tax-free.<br> | |||
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=== | |||
===Mega Backdoor Roth IRA | |||
==ETFs== | ==ETFs== | ||
Exchange-traded funds. Typically these will have a fee called an expense ratio. | |||
However, since they are not usually actively managed, their fees are often lower than mutual funds. | |||
The expense ratio is measured in basis points. | |||
25 basis points is an annual fee of 0.25%. | |||
===Stocks=== | ===Stocks=== | ||
* <code>SPY</code> | * <code>SPY</code> |