Finances FYI Presented by JPMorgan Chase
You likely know that a secure financial future involves saving. Your goals may include building a retirement fund, having an emergency fund, and putting money aside for large purchases like a car or home. But did you know there are many options besides a 401K and regular savings account?
Discover innovative savings strategies that can help you meet your long-term financial goals.
IRAs
IRAs are tax-incentivized accounts that encourage savings for retirement. Limited contributions to traditional IRAs are usually tax deductible depending on whether you or your spouse have retirement plan options at work. Roth IRAs are not tax-deductible, but you can withdraw funds during retirement without paying federal income tax or penalties.
Health Savings Account
Health Savings Accounts (HSAs) for qualified medical expenses such as deductibles and copayments have many financial benefits, including pre-tax contributions and earning interest on your contributions. You can only access HSAs with high-deductible health insurance plans or if you are not on Medicare. They also limit how much money you can contribute and penalties if you withdraw for non-medical costs before age 65.
529 Plans
529 Plans offer tax advantages to encourage savings for a child’s educational tuition. Earnings are not taxed when used for educational expenses, including tuition, fees, room and board for private schools, and higher education by the IRS and some states. The only limits on contributions are the recipient’s educational needs and any gift tax implications.
Taxable Investment Accounts
Typically, savers will max out their retirement investments first to make the most of tax incentives. After that, investing in the stock market has become easier than ever. You will pay income tax and taxes on any interest, dividends, or capital gains for this type of investment. Set up accounts with full-service brokerage firms that provide expertise and financial services in exchange for administrative fees. Or go the DIY route with self-directed platforms such as Vanguard or Ally Invest. Companies, including SoFi, Acorns, and Betterment, provide a middle ground for robo-advisors who use algorithms to guide investment decisions.
Annuities
Annuities sold by insurance companies invest tax-deferred money on your behalf. After an investment period, you will receive payments from the company. The rate depends on the market and terms of the annuity. While the guaranteed payments are appealing, savers will want to check fees and commissions while understanding growth potential, which is usually less than the stock market.
Municipal and Treasury Bonds
Municipal bonds issued by local, county, or state governments help fund construction projects such as schools or highways. You are providing a loan to these entities and will receive tax-free interest in exchange. Most are sold in increments of $5,000 or smaller amounts through EFTs, have low default rates, and offer a stable fixed-income strategy.
Treasury Bonds are sold through the U.S. government for terms of 20-30 years with a set interest rate. Interest is paid every six months and is subject to federal taxes. If you sell bonds before maturity, they risk loss due to changes in interest rates.
Bucket Savings Accounts
Savers may find it helpful to have separate buckets for different goals such as a new car, a wedding, a trip abroad, summer camp for the kids, or a large upcoming bill. Bank accounts with a bucket feature allow you to keep savings in one account but then distribute money into sub-categories or buckets so you can track progress toward your goals.
Money Market Accounts
Money Market Accounts (MMAs) offer higher interest rates with higher minimum balances than traditional savings accounts. They offer the flexibility of limited access to your money through withdrawals, checks, or debit card use. These accounts can be a good option for mid-term savings goals or emergency funds where you don’t need to use the money soon but want to earn a little more money on it in the meantime.
CDs
A Certificates of Deposit (CD) is a savings account with a fixed interest rate and term lengths of 3, 6, or 12 months to multiple years. Generally, interest rates will increase with longer terms. With higher interest rates than savings or money market accounts, these can be a helpful way to save for a long-term goal with a specific timeline. However, there are usually penalties for withdrawing early, so if you need the money sooner, other options may be more beneficial.
Implement a savings strategy that best matches your goals with the type of account. Be sure to check tax implications, interest rates, and restrictions. A financial advisor can help answer questions and create a diversified savings plan.
Finances FYI is presented by JPMorgan Chase. JPMorgan Chase is making a $30 billion commitment over the next five years to address some of the largest drivers of the racial wealth divide.
