This post is for new hospitalists to help understand the basics of different types of investment accounts.
| Name of account | Types | Dollars | $ Limits | Funds to invest in | Vanguard | Fidelity | Schwab | Features | Reduces Taxable income |
| Checking account | – | Post-tax | None | Cash | – | – | – | Direct deposits, paying bills, checking account churning with different banks to earn bonus money | No |
| High-Interest Online Savings account | – | Post-tax | None | Cash | – | – | – | At least get some interest earning, emergency fund, 2 yrs expenses | No |
| CD | Post-tax | – | – | – | – | No | |||
| HELOC | Post-tax | – | – | – | – | – | can act as emergency fund | No | |
| Credit cards | – | – | – | – | – | – | – | can act as emergency fund, credit card churning if you have time to earn some bonus money | No |
| 401k | solo 401(k) for self employed | Pre-tax | 19,500[$26K for 50 and older], $58K for Solo 401K | Total Stock Market Index Funds, S&P 500, can be most aggressive [100% stocks] | VBFMX, VSCIX, VMCIX, VTSAX, VITPX | SWTXS | automatic contribution from paycheck for DCA, grows tax deferred, taxed upon withdrawal, employer match, can’t be withdrawn before 59½ without 10% penalty, can take loan for expenses or to buy home, main retirement account, can roll over into Roth IRA, will have [Required Minimum Distribution] RMDs after 72yrs age | Yes | |
| TSP | Similar to 401K | For federal employees | Yes | ||||||
| 403b | similar to 401K | Pre-tax | 19,500[$26K for 50 and older] | – | FXAIX, FXNAX | – | tax deferred, Only available to employees of public schools and certain tax exempt organizations | Yes | |
| 457b | governmental 457, non-governmental 457 | Pre-tax | 19,500[$26K for 50 and older] | VBMFX | tax deferred, taxed upon withdrawal, 10% penalty before 70½ unless for qualified emergencies | Yes | |||
| Taxable Brokerage account | Post-tax | None | Low cost index funds-Total Stock Market Index funds, S&P 500, International stock funds [foreign tax credit], High Yield Municipal Bonds | VTSAX [ETF: VTI], VFIAX [ETF:VOO], VTIAX, VEMAX, VTMGX, VFWAX | FZROX [ETF: -], VXAIX [ETF: -], OPTAX, ORNAX, RMUNX | SWTSX [ETF: SCHB], SWPPX [ETF: SCHX] | very liquid, can help in [TLH]Tax Loss Harvesting [VFIAX, VTSAX, VLCAX, VTCLX are similar and can help in TLH], Donate appreciated shares to reduce taxes, Stepped-up cost basis in estate planning upon death, long term capital gains tax [0%, 15% or 20% based on your income] for stocks if sold after one year, municipal bond interest in taxable account may result in SS benefits being taxable | No | |
| Traditional IRA | As High income professionals, this account is mainly used for doing backdoor Roth contributions | we put post tax money if converting to Roth IRA via backdoor | 6,000[$7K for 50 and older] | Like Roth IRA | Like Roth IRA | Like Roth IRA | Like Roth IRA | Can contribute for last year until you file taxes this year [April 15], Tax deferred, taxed upon withdrawal, 10% penalty before age 70½, can roll over into Roth IRA with Roth Conversion Ladder, will have [Required Minimum Distribution] RMDs after 72yrs age | No |
| Roth IRA | Backdoor Roth IRA, Mega Backdoor Roth IRA | Post-tax | 6,000 per spouse even if one spouse works [$7K for 50 and older] | REITs High Dividend stocks [Small Caps, Mid Caps], High Yield Bonds | VGSLX, VSIAX, VMVAX, VTSAX | Earnings grow tax free, income limit in 2020 is $139,000 for individuals and $206,000 for married couples, Best way to give to heirs [generational wealth], withdrawal without tax and penalty at 59½, no RMDs if spouse inherits but beneficiaries have to take RMDs if they inherit, kids can open if they have earned income, can withdraw your contributions early, not tied to employer, not counted as income for making social security taxable, backdoor Roth can be used as emergency fund | Yes | ||
| SEP IRA | 58,000 | tax deferred, | |||||||
| HSA | Healthcare expenses account but Can use it as investment account | Pre-tax | Self-only: $3,600 Family: $7,200, catch-up contributions (age 55 or older) $1,000 | REITS | VGSLX | Can contribute for last year until you file taxes this year [April 15], Only if you have HDHP [High Deductible Health Plan], Only for health care expenses until age 65, Triple tax free[=contribute, grow and withdraw tax free], can withdraw money much later in life and pay for medical bills if you save the bills from decades [=Stealth IRA, at age 65yr withdraw money just like from a Traditional IRA], Can have Premium Pass Through Contribution, no RMD, not counted as income for making social security taxable, can use as emergency fund if you saved bills | Yes | ||
| 529 | a prepaid tuition plan, an education savings plan | Post-tax | 15,000/yr per individual per yr, $75K front load for 5yrs | often limited to more conservative securities, like mutual funds and ETFs | Target date funds, S&P 500, VTSAX | Target date funds, S&P 500, VTSAX | Target date funds, S&P 500, VTSAX | use for college expenses like tuition, fees, room and board, elementary or secondary school tuition, grows tax deferred, withdraw it tax free, can transfer to another kid, invest in any state plan, counted as parents’ asset on the FAFSA, | Yes |
| Real Estate | Post-tax | – | REITS, Syndications, single family homes | – | – | – | Saves taxes, monthly income, uses leverage [Other people’s money], 1031 exchanges, | Yes | |
| UTMA | Kids Custodial Account | Post-tax | no limits but gifting limit by anyone is $15K | Real estate, stocks, bonds, ETFs | – | – | – | Wider investment options including Real estate, Kids can access funds at 21yrs [depends on state], Kids can do anything with this money, subjected to long term and short term capital taxes after the first $2,100 in unearned income (dividends, capital gains, and interest on your contributions), counted as students’ asset on the FAFSA, You can move money to a 529 plan, . | No |
| UGMA | Kids Custodial Account | Post-tax | no limits but gifting limit by anyone is $15K | stocks, bonds, ETFs | – | – | – | Kids can access funds at 18yrs [depends on state], Kids can do anything with this money, subjected to long term and short term capital taxes, counted as students’ asset on the FAFSA, You can move money to a 529 plan. | No |
| FSA | Medical | Pre-tax | $2,750, employer may limit its employees to less | – | – | – | – | Use it or lose it yearly, medical bills payment | Yes |
| FSA | Dependent care | Pre-tax | $5,000 | – | – | – | – | Use it or lose it yearly, kids day care expenses | Yes |
| Social Security Benefits | – | – | – | – | – | – | – | can start taking at age 62 or delay until 70, the more it’s delayed the more we get monthly, will be taxed, | No |
Tax efficient funds are fine in any account.
Regular Rebalancing of Stock/Bond ratio is easy if you have enough room in tax advantaged accounts to hold some of tax efficient stock fund as stocks and bonds can be exchanged without tax consequence.
Rebalancing in taxable accounts is done by investing new money to avoid capital gains that happen if stocks are sold.
Note: Not a financial advice. Just for education and entertainment. Consult your own advisor for your own financial decisions.
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