At HTG, we understand that starting your investment journey can feel overwhelming with so many account options available. This month, our focus is to help you understand the different types of investment accounts, outside of what your employer offers, and how each one serves specific financial purposes.
Taxable Investment Account
Purpose: General investing and savings with complete flexibility
Contributions: unlimited
Main Benefit: No contribution limits, no withdrawal restrictions, and access to your money anytime. Perfect for building wealth outside of retirement accounts or saving for short- to mid-term goals like a home down payment.
Why is it called a “taxable” account? Gains/earnings are subject to taxes!
- Investment gains: You’ll pay capital gains tax when you sell investments for a profit. For example, if you buy a stock for $1,000 and sell it for $1,500, you owe tax on the $500 gain. If you hold your investment for over a year, you will qualify for the gain being taxed at the capital gains rate (0%-20%) which is more favorable versus if you hold for less than a year which is taxed at your ordinary income rate (10%-37%).
- Dividends and interest: Any dividends or interest earned are generally taxable in the year received, even if you reinvest them.
Traditional IRA (Individual Retirement Account)
Purpose: Tax-deferred retirement savings
Contributions: up to $7,000 in 2025 (or $8,000 if ages 50+) and you must have earned income equal to or greater than your contribution amount.
Main Benefit: The main benefit of a traditional IRA is that you pay no tax on investment gains due to tax-deferment until withdrawal. You are not required to make distributions until age 73, which will be taxed as ordinary income, and the assets are essentially locked up until age 59 1/2 years old (with some exceptions). You may have the opportunity to get a tax deduction on your contribution (eligibility is based on income and employer retirement plan coverage).
Note: If you are leaving an employer, you can directly transfer your 401(k) to a Rollover IRA to maintain the tax-deferred advantage.
Roth IRA
Purpose: Tax-free retirement savings
Contributions: up to $7,000 in 2025 (or $8,000 if ages 50+) and you must have earned income equal to or greater than your contribution amount.
Main Benefit: Pay taxes on contributions now, then enjoy tax-free growth and withdrawals in retirement. All earnings grow tax-free, and qualified distributions (including both contributions and earnings) are never taxed. However, you must meet income eligibility limits to contribute directly to a Roth IRA.
SEP-IRA (Simplified Employee Pension)
Purpose: Tax-deferred retirement savings ideal for self-employed individuals and small business owners
Contributions: 25% of your income or $70,000 (whichever is less) for 2025
Main Benefit: Higher contribution limits than traditional IRAs, allowing you to save up to 25% of your income or $70,000 (whichever is less) for 2025. Only employers can make contributions to these accounts, employees cannot contribute. All contributions must be made equally for all eligible employees as a percentage of compensation. Employers are also able to capture a tax deduction on any contributions made to a SEP IRA for the business.
Health Savings Account (HSA)
Purpose: Tax-free savings for medical-related expenses
Contributions: $4,300 for individuals and $8,550 for families in 2025
Main Benefit: Triple tax advantage – tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Which Account Should You Choose?
The best account depends on your specific goals, timeline, and tax situation. Many young professionals benefit from starting with a Roth IRA for retirement savings and a taxable account for pre-retirement savings and flexibility. As your income grows, you might add other account types to optimize your overall financial strategy.
Remember, the most important step is getting started. Time and compound growth are your greatest allies as young investors.
Take Action:
- Assess Your Financial Goals – Write down your short-term (1-3 years), medium-term (3-10 years), and long-term (10+ years) financial objectives.
- Review Your Current Financial Situation – Calculate your monthly income, expenses, and determine how much you can comfortably invest each month.
- Start with the Basics – Consider opening a Roth IRA for retirement savings, if eligible, and a taxable account for flexibility.
- Set Up Automatic Contributions – Schedule regular monthly transfers to make investing a consistent habit rather than a sporadic activity.
- Start Small, Think Big – Begin with whatever amount you’re comfortable with. You can always increase contributions as your income grows.