Top 3 Wealth Building Accounts

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Today I'm going to share the top 3 wealth building accounts.

Knowing the different accounts can help you:

• Plan your future.

• Build your net worth.

• Retire sooner than later.

Unfortunately, wealth building accounts aren't well known.

Investing Isn't Taught

Investment accounts aren't talked about in:

• Algebra class.

• Geometry class.

• Basic math class.

Not learning these accounts can lead to:

Knowing the options help you plan your future.

Here are the top 3 wealth building accounts:

1. The 401k

A 401k is a common wealth building tool.

Many employers offer it as an employee benefit.

Outside the U.S. it may be called a pension or superannuation.

401ks are easy to set up and easy to divert part of your paycheck into.

The best part—

Many employers put money into the account on your behalf.

According to Fidelity Investments, 4.8% is the average amount they put in.

This means if you're making $70,000 per year.

Your employer may put $3,360 into your account each year.

That adds up quickly.

As of 2024, you can put up to $23,000 of your pay into a 401k each year.

If you're 50 or older you can put $30,500.

After the money goes in, you need to decide how to invest it.

Most 401ks have customer support people that can help.

One downside with 401ks—

There aren't many investment options to choose from.

Your choices are limited.

Money inside a 401k grows tax-free until you begin taking it out during retirement.

Retirement starts at age 59 1/2.

You can put off taking out money until age 72 if you want.

At that point, you must take money out each year.

Some employers call their retirement plan a 403b or a 457b.

They are similar to a 401k.

Read up on your retirement benefits at work.

Make sure you're getting all the money you're entitled to.

2. The Traditional IRA

A Traditional IRA is a retirement plan for everyone.

IRA stands for individual retirement account.

People who don't have a 401k often open a Traditional IRA.

They're similar to a 401k.

Your money grows tax-free until retirement.

And money you put into the account reduces your taxable income just like a 401k.

That means—

If you earn $70,000 per year and put $5,000 into a Traditional IRA or a 401k.

You won't pay income tax on $5,000 of your income.

That saves you money.

There are a few differences between a Traditional IRA and a 401k.

$7,000 is the most you can put into a Traditional IRA each year.

Or you can put $8,000 in if you're 50 or older.

Here's the limits for different investment accounts:

IRAs also have more investment options than a 401k.

You can invest in stocks, bonds, and many other things.

Most 401ks don't give you all those options.

There's many ways to open an IRA online.

Vanguard, Fidelity, or Schwab are online brokers many people use.

3. The Roth IRA

A Roth IRA is different than a Traditional IRA.

You don't pay income tax on the money you put into the account.

Instead, you pay tax when you take money out of the account during retirement.

With a Roth IRA, it's the opposite.

You pay income tax on the money you put in the account.

You don't pay tax when you take money out during retirement.

I know...

That sounds confusing.

So, which account is better?

If you think your tax rate will be higher in retirement, people often go with a Roth IRA.

If you think your tax rate will be lower in retirement, people often go with a Traditional IRA.

Most people have no clue.

So, they use both accounts.

Two more big differences between a Traditional IRA and a Roth IRA are:

1. You don't have to begin taking money out at age 72 with a Roth IRA.

2. You can't put the full $7,000 into a Roth IRA if your annual income is over the limit.

The income limit for 2024 is:

• $146,000 if you're single

• $230,000 if you're married

A Roth IRA's main perk is paying no income tax when taking money out during retirement.

Investing can be confusing.

Especially if you're just getting started.

The more you learn, the easier it gets.

That's all for today.

See you next week.