Traditional IRA

What is it? An individual retirement account (IRA) is an investing account designed to help you save and invest for retirement on your own, independent from any workplace accounts, like 401(k)s or 403(b)s. Each year you can contribute up to the annual IRA contribution limit. Once money is in your traditional IRA, those dollars can potentially grow until you withdraw them in retirement. You'll have to pay taxes on those withdrawals, but all that potential investment growth is tax-deferred if you wait until you're age 59½.¹ Deferring taxes may help grow your wealth faster by keeping more of it invested and potentially growing.

Advantages:

• Tax savings today: If you're within the IRS income limits, you may be able to deduct all or part of your contributions from your federal taxes.²
• Some access to your money: You can withdraw penalty-free for certain expenses, such as your first home purchase, birth or adoption, or qualified higher education expenses.³
• Easy to qualify: To be eligible to contribute to an IRA, you just need to have earned income. You cannot contribute more than what you've earned, or more than the IRS income limit. You can contribute to your traditional IRA as well as your 401(k) or another workplace plan, but IRA contributions may just not be tax-deductible.

Disadvantages:

• Lower contribution limits: You can stash away a sizable chunk of change in your IRA, but that limit is much less than some other retirement savings accounts, like a 401(k) for example.
• Early withdrawal penalties: Any unqualified withdrawal from a traditional IRA before the owner reaches age 59½ not only requires income taxes be paid but also an additional 10% penalty on the amount withdrawn.
• Required minimum distributions (RMDs): Once you reach age 73, you're required to start taking money out of your traditional IRA, regardless of whether you need the funds.

Might be right for you if …

You're saving for retirement and want to take advantage of tax benefits today and in the future. Even if you have a workplace retirement plan, a traditional IRA could be a great way to help save for retirement beyond the annual contribution limits of a 401(k) or 403(b).

Roth IRA

What is it? A Roth IRA is an individual retirement savings account (meaning no employer needed) with different tax advantages than a traditional IRA. In a Roth IRA, you contribute money you've already paid taxes on up to the annual IRA contribution limit, which can then be invested and potentially grow federally tax-free and be withdrawn tax-free once you reach age 59½ and met the 5-year aging requirement.⁴ The catch? To be eligible to contribute you have to fall within the IRS's Roth IRA income limits.

Advantages:

• Tax savings in retirement: Any investment growth in a Roth IRA is federally tax-free, with tax-free withdrawals in retirement if your account meets the 5-year aging rule.⁵
• Flexible access to your money: Any amount you contribute to your Roth IRA can be withdrawn without taxes or penalties, anytime for any reason.
• No RMDs: Unlike traditional IRAs, there are no required distribution for Roth IRAs at any age based on the account owner's lifetime.

Disadvantages:

• Income and contribution limits: If you make more than the IRS's income limits, you may only be eligible for a partial contribution,⁶ or may be ineligible to contribute altogether. Even if you're within the income limits, Roth IRAs have the same contribution limits as traditional IRAs. But you can't contribute more than a single contribution limit between the 2 accounts.
• Non-deductible contributions: You can't deduct contributions to your Roth IRA from your federal income taxes, meaning there are no immediate tax savings. Of course, the trade-off is future tax-free withdrawals.

Might be right for you if …

You're looking for potential tax-free growth and tax-free withdrawals, and you meet the IRS's income limit eligibility requirements. It could be smart to contribute to a Roth IRA if you qualify and if you think that taxes today are lower than what they may be for you in the future. Worried about accessing your money early in an emergency? Knowing you can withdraw contributions from your Roth IRA anytime could give you peace of mind.

Brokerage account

What is it? A brokerage account is an investment account that allows you to buy investments like stocks, bonds, mutual funds, and ETFs. Brokerage accounts do not have some of the restrictions that other tax-sheltered accounts have, such as IRAs, 401(k)s, or HSAs. You can withdraw funds penalty-free at any time in a brokerage account.

Advantages:

• Access to your money when you want: Funds in a brokerage account are accessible without any tax penalties or restrictions, allowing you to access your investments and money when needed.
• No contribution or income limits: Unlike some other investing accounts, such as IRAs, HSAs, or 529s, there's no limit to the amount you can put into your brokerage account annually. Plus, anyone can open an account regardless of their income.
• Investment options: With a brokerage account, you have the freedom to invest in a wide range of assets, like options and derivatives if your financial institution allows.

Disadvantages:

• No tax advantages: Unlike some goal-based accounts, brokerage accounts don't come with any tax-deferred growth or tax-deductible contributions. There are no tax savings today or tomorrow with a brokerage account, meaning any gains or losses in the account will factor into your tax bill each year.
• No employer benefits: You won't receive any employer perks in a brokerage account, such as matching contributions, that you might be eligible for if you save in a workplace retirement plan or HSA.
• Trading fees: Some financial institutions charge fees or commissions for buying and selling investments in a brokerage account, like stocks, bonds, ETFs, and mutual funds. (The Fidelity brokerage account doesn't charge commission fees for online US stock, ETF, and option trades.)⁷

Might be right for you if …

You want the ability to add or withdraw funds without restrictions. Or if you're saving for something other than retirement, health care, or education—otherwise, a tax-advantaged account might be a better option. If you've maxed out the contribution limits in tax-advantaged retirement accounts, then a brokerage account can be a great place for extra savings. Be sure to do your research on investment options and potential fees before you choose a brokerage account provider.

Cash management account

What is it? A cash management account is an account at a financial institution that generally combines most features of a bank checking or savings account with the flexibility of a brokerage account. Fidelity's cash management account offers checkwriting, bill pay, a debit card, and choice of a money market mutual fund⁸ or an FDIC-insured deposit sweep option for uninvested cash. It also gives customers the ability to buy and sell certain investments within the account.

Advantages:

• All-in-one solution: A cash management account gives you the ability to save, spend, and invest, possibly all from one account. This might make sense for people who want to streamline their banking and investing.
• Competitive rate of return, low fees: Cash management accounts can sometimes offer a competitive rate of return when compared with the national average rate on savings and checking accounts at traditional banks. Plus, depending on the provider, they can come with low or no fees. Fidelity's version offers no fees or minimums on the account, plus reimbursed ATM fees globally.
• Higher FDIC protection limits: At a traditional bank, your money is FDIC-protected up to $250,000 per depositor, per account type. Fidelity partners with multiple FDIC-insured banks for its cash management account, splitting your money across institutions and offering up to $5,000,000 in FDIC insurance.⁹

Disadvantages:

• No tax advantages: Like an ordinary brokerage account, a cash management account does not come with tax benefits. Any income you generate in the account, such as investment growth, dividends, or interest, will be factored into your annual tax bill.
• Primarily digital account: Unlike a traditional brick and mortar bank, most cash management accounts are managed digitally. This means you'll probably need to deposit cash online rather than in person and you may not be able to get something like a cashier's check, which would come from a physical bank. Withdrawals can typically be made at any ATM but would be subject to daily ATM withdrawal limits.

Might be right for you if …

You're looking for a flexible account where you can spend, save, and invest at once. Or you're shopping around for a bank alternative with higher interest rates on your uninvested cash savings. A cash management account can work well as a multipurpose option to save for your goals, but remember to compare things like interest rates, fees, balance minimums, and ways to access your money before you choose, as these can vary across different providers.

SEP IRA

What is it? A SEP IRA (Simplified Employee Pension Individual Retirement Accounts) is a retirement plan for self-employed individuals and small-business owners. It's specifically designed to help small-business owners provide retirement savings plans to themselves and their employees with fewer administrative fees and requirements than typical workplace plans, like 401(k)s.

Advantages:

• Tax benefits: Contributions to a SEP IRA are tax-deductible, reducing your taxable income for the year and potentially reducing your tax bill.
• Easy setup and maintenance: SEP IRAs are relatively easy to start up and maintain, with minimal administrative requirements and paperwork compared to some other workplace retirement plans.
• High contribution limits and flexibility: SEP IRA contribution limits are much higher than other IRA options. Plus, business owners have the flexibility to decide how much to contribute each year, allowing for adjustments based on business profitability.

Disadvantages:

• No catch-up contributions: Unlike some other retirement accounts, SEP IRAs do not allow catch-up contributions for individuals aged 50 and older, potentially limiting retirement savings for older workers. Also, no employee deferral contributions are allowed.
• Limited withdrawal flexibility: Withdrawals from a SEP IRA before age 59½ may be subject to taxes and penalties, similar to traditional IRAs.
• Required employer contributions: If you're a business owner and want to contribute to your own SEP IRA, you are required to make contributions to all SEP IRA eligible employees.

Might be right for you if ...

You're self-employed or a small-business owner and looking for a retirement savings plan with high contribution limits, tax benefits, and low administrative fees. If you have employees and want to open a SEP IRA, you'd also have to be comfortable making contributions for all eligible employees too.

Solo 401(k)

What is it? A solo 401(k), or self-employed 401(k), is a retirement account designed for self-employed individuals or small-business owners with no employees (apart from their spouses). Similar to a traditional 401(k), you fund the account through contributions on your own behalf as the employee from your pre-tax compensation—plus, you can contribute as the employer. Those contributions can be invested and potentially grow tax-deferred until withdrawn in retirement, when they'll be taxed as ordinary income.

Advantages:

• Employee and employer contributions: Not only can you contribute up to the employee 401(k) contribution limit, but you're also allowed to contribute as the employer up to 25% of your compensation (with some IRS limits).
• Tax benefits: Contributions to a solo 401(k) are tax-deductible—from your personal income if your business is not incorporated or as a business expense if it is. Also, your investments can potentially grow tax-deferred while you save.
• Investment options: Unlike some traditional 401(k) plans, solo 401(k)s generally offer a wide range of investment options, giving you more control over your portfolio.

Disadvantages:

• Limited eligibility: Only self-employed individuals with no employees (or their spouses if they receive compensation from the business) qualify for a solo 401(k). If you add employees at a later date, you'll either have to convert to a standard 401(k) or else terminate the plan.
• Can only withdraw money at a triggering event: To take money out, you need to reach a triggering event, which could be reaching age 59½.
• Must make recurring contributions: The IRS requires regular and substantial contributions for the plan to remain active.

Might be right for you if ...

You're self-employed or a small-business owner who isn't planning to take on employees and who's focused on saving aggressively for the future. With high contribution limits, flexible investment options, and tax advantages, a solo 401(k) can be an attractive option to help you save for retirement.

SIMPLE IRA

What is it? A SIMPLE—Savings Incentive Match Plan for Employees—IRA is a retirement savings account that's designed for self-employed individuals or small businesses with fewer than 100 employees. With a SIMPLE IRA, an employee can defer a portion of their salary into the account, while their employer can match that contribution up to 3% (4% in some cases) of the employee's salary or contribute a fixed percentage. The account offers employees the tax benefits of a 401(k) with the convenience of a personal IRA: Contributions are made pre-tax and money invested in the account can potentially grow tax-deferred until withdrawn.

Advantages:

• Tax benefits: Employee contributions to a SIMPLE IRA are made pre-tax to reduce your taxable federal income. For employers, contributions could be a tax-deductible business expense. Any investments within the account can also potentially grow tax-deferred until retirement.
• Easy setup: Compared to 401(k) plans, SIMPLE IRAs are generally lower cost and require less administrative work to establish and maintain.
• Investment options: Unlike some workplace plans that may have limited investment options, SIMPLE IRAs generally have access to a wide range of different investments, including individual stocks and bonds.

Disadvantages:

• Early withdrawal penalties: Similar to other retirement accounts, you may have to pay a 10% penalty on top of federal income taxes if you withdraw from a SIMPLE IRA before age 59½.¹⁰ If you withdraw within the first 2 years of establishing the account, that penalty could be 25%.
• Creditor protection: SIMPLE IRAs do not have the same level of creditor protection as some other popular retirement savings plans.

Might be right for you if …

You own a business with fewer than 100 employees and want a low-cost option that helps you contribute to your own and your employees' retirement savings. Or you're the employee of a small business that offers a SIMPLE IRA and are looking to score retirement-savings tax advantages and a savings boost from employer contributions.

HSA

What is it? An HSA (health savings account) is a tax-advantaged savings account designed to help you save for eligible medical expenses. To contribute to an HSA, you must have an HSA-eligible health plan, which falls under the category of high-deductible health plans (HDHPs). Typically, most HDHPs are HSA-eligible. Because of their 3 tax advantages,¹¹ HSAs can be a great place to grow your medical savings for the near future and even for further down the road in retirement.

Advantages:

• Triple tax benefits: First, contributions are tax-deductible; second, withdrawals for qualified medical expenses are tax-free; and third, any investment growth is tax-free if used for qualified medical expenses.
• Flexibility after age 65: After age 65, money in your HSA can be withdrawn and used for non-medical expenses, penalty-free. You will have to pay income tax on those withdrawals, though.
• Portability: HSAs are completely yours. Even if you change jobs or health care plans, you keep the account and the money you saved, plus you have the option to transfer it into a new employer-sponsored HSA at your next job.

Disadvantages:

• HSA-eligible health plan requirement: To be eligible to contribute to an HSA, you must have an HSA-eligible HDHP. HDHPs may not be suitable for everyone, especially those with high health care needs, or they may not be offered by your employer.
• Contribution limit: HSAs have an annual contribution limit, which caps the amount you can contribute to the account each year.
• Nonqualified withdrawal penalties: Before age 65, money in your HSA must be used for qualified medical expenses or you'll be on the hook for both income taxes and penalties on withdrawals.

Might be right for you if ...

Your workplace offers an HSA-eligible health plan that makes sense with your current medical needs, and you want to save for current and future medical expenses while scoring tax benefits. HSAs are particularly beneficial if you can afford the higher out-of-pocket health costs today to maximize tax savings for health care expenses tomorrow.

529 plan

What is it? A 529 plan is a flexible and tax-advantaged investment plan designed to help you save and invest for future education expenses. And it's for more than just college—money in a 529 can also help pay up to $10,000 of tuition for K to 12 education. Although 529 plans have only one beneficiary, you can change the beneficiary at any time to an eligible family member.^12,13 And, if certain criteria are met, 529 funds can be transferred into the beneficiary's Roth IRA.¹⁴

Advantages:

• Tax-free withdrawals for qualified education expenses: You contribute already-taxed dollars to a 529, but invested funds in the account can grow tax-deferred while you save. You won't have to pay federal income taxes on investment growth if withdrawals are used for qualified education expenses.
• Broad range of qualified expenses: Funds within a 529 can be used to pay for more than just tuition; they also can go toward room and board, books, and even certain technology expenses. Funds can even be used to pay up to $10,000 for student loan expenses.¹⁵
• State benefits: Many states offer tax incentives, such as tax deductions for residents for contributing to their specific 529 plans.¹⁵

Disadvantages:

• Penalties for nonqualified withdrawals: For nonqualified withdrawals, the portion attributed to investment earnings is subject to federal and state income taxes plus a 10% penalty.

Might be right for you if …

You're saving for qualified education expenses for your children, or other beneficiaries. A 529 plan may be a great place to start saving for yourself for future education expenses with tax advantages.

The Fidelity Youth^® Account

What is it? The Fidelity Youth^® Account is a teen-owned brokerage account that gives teens ages 13 to 17 the power to save and invest their own money—while letting parents stay connected. Giving your teens access to a brokerage account can help empower them to prepare for their financial future and safely build strong money skills for adulthood.

Advantages:

• Free to open: The Fidelity Youth^® Account has no subscription fees, no account fees, and no minimum balances to open.¹⁶ Teens can also request a debit card for spending.
• Can invest with just $1: Teens can invest in fractional shares—or slices of investments—allowing them to invest with as little as $1.
• Parental supervision: Parents can view their teen's investments and transactions, and get notified of account activity, to provide guidance and oversight.
• Learning content: Parents and teens have access to videos, tools, and articles to learn financial skills, and teens can actually earn money for completing lessons in the Fidelity Youth app.

Disadvantages:

• No tax advantages: The Fidelity Youth^® Account is not designed for storing retirement or education savings. And there are no special tax benefits with this account.
• No custodial control: Unlike UGMA/UTMA accounts, you as the parent do not have custodial control of the Fidelity Youth^® Account. Your teen has access to that money and can make investment decisions, though you will see all the activity.
• Parents must have an account: In order to open the Fidelity Youth^® Account and monitor activity, parents must have their own account at Fidelity.

Might be right for you if …

You want to teach your teen good financial habits and give them the power to spend and invest on their own. The Fidelity Youth^® Account can be a valuable tool to help your teen learn to manage their finances and start investing in a supervised way.

UGMA/UTMA brokerage account

What is it? UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) brokerage accounts are custodial accounts that help adults save money for minors. With these accounts, the adult adds money and chooses investment options, and when the child reaches a certain age—generally between 18 and 25, varying by state—assets and control of the account must be transferred to the minor. Once the minor gets control of the money, there are no restrictions on how the money can be used or invested.

Advantages:

• No contribution limit: UGMA/UTMA accounts have no contribution limit, but big contributors should be aware of the gift tax. Beginning on January 1, 2024, you can contribute up to $18,000 each year ($36,000 for married couples who elect to gift-split) without paying a gift tax.
• Asset contributions: Adults can contribute more than just cash to UGMA/UTMA accounts: They can transfer stocks, bonds, mutual funds, and other securities to the account.
• Ability to maintain control: UGMA/UTMA accounts are a way for adults to transfer assets to minors while still controlling the investing decisions of those dollars until the child is an adult and reaches the transfer age.

Disadvantages:

• Irrevocable gift: Once assets are transferred to a UGMA/UTMA account, the money belongs to the child. The money must be used for the child's benefit.
• Tax considerations: While minors may score potentially lower tax rates, certain types of income and earnings generated from investments within UGMA/UTMA accounts may be subject to taxes. It may be smart to consult a tax advisor.
• Impact on financial aid: Assets that are held in UGMA/UTMA accounts are considered assets owned by the child, which can impact financial aid when applying for college potentially more significantly than assets held in a 529.

Might be right for you if …

You want to save and invest for a child's future needs, and you're comfortable transferring control of the assets to the minor once they reach the age of majority. A UGMA/UTMA account could be a good option for passing money to the next generation; just remember the tax implications and the impact on financial aid eligibility. Plus, if you're specifically saving for education expenses, you may want to consider a 529 plan first due to the tax benefits.

Roth IRA for Kids

What is it? A Roth IRA for Kids is a tax-advantaged retirement account opened for a child under 18. The account is managed by an adult (aka the custodian of the account) and then transferred to the child at the age of majority, which can differ from state to state, but is usually 18 to 25 years old. Money in the account can be invested, and potential investment growth is tax-free in both the Roth IRA for Kids account as well as once it's transitioned to your child's own IRA at the age of majority.¹⁷

Advantages:

• A savings head start: Time is on your child's side. The longer money is invested, the more potential it has to benefit from compound growth. A little saved today has a lifetime to potentially grow.
• Emergency access: Just like a regular Roth IRA, contributions to a Roth IRA for Kids can be withdrawn without taxes or penalties at any time.
• Custodianship: As the custodian of the account, you'll get to manage and invest the IRA money until the child becomes an adult.

Disadvantages:

• Child must have earned income: To be eligible to contribute, your child needs to earn income to qualify for contributions—whether it's as a babysitter, lifeguard, dog-walker, you name it.
• Contribution limit capped at earned income amount: Similar to adults, a Roth IRA for Kids has an annual contribution limit. But regardless of that limit, you can't contribute more than the amount of income your child earned over the year. So, if your child earns $1,000 mowing lawns in a year, you could only contribute $1,000 that year.
• Early withdrawal penalties for earnings: Although contributions can be withdrawn at any time, the investment earnings from those contributions can only be withdrawn penalty-free after age 59½, unless your child meets certain criteria.

Might be right for you if …

Your child earns income and you're looking for a tax-advantaged way to help give them a head start saving for retirement. With extra saving years and tax-free investment growth, a Roth IRA for Kids could help turbocharge your child's retirement savings.

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