The blog title is pretty self-explanatory, but we’ll say it again: every woman needs 2 investment accounts. Let’s break it down.
You need one tax-advantaged investment account.
“Tax-advantaged” refers to any kind of investment that’s exempt from taxation or offers other types of tax benefits. In other words, it’s for your retirement. The most common examples of a tax-advantaged account are an IRA and a 401k.
You can’t touch the money in a tax-advantaged account until you’re 59½. Plus, there are limits to how much you can contribute each year.
Millions of Americans withdraw from tax-advantaged accounts early because they haven’t planned properly, resulting in massive tax penalties.
Retirement isn’t the only big expense you’re going to have—you want to go to Italy! You want to start that business! You want to start a family!! You want to buy that boat! (Do you really need the boat, though?) So you have to make sure you’re putting the right amount into an account you can access other than your retirement account so you won’t have to withdraw your funds early and get penalized.
Which brings us to our next point…
You also need one taxable investment account.
A taxable account does not have any tax benefits, but you can also tap into your money whenever you need it. It’s called a brokerage account and it holds investments just like a retirement account but without the tax advantages. A quick and easy non-tax-advantaged brokerage account you can open in less than 5 minutes online is a robo-advisor. Living in 2019 has some great advantages and robo-advisors are one of them because they do all the heavy lifting for you for about a quarter of the cost of a hiring a financial advisor to the same thing. Inside, they’ll still hold a mix of stock, bonds, ETFs, etc just like a tax-advantaged retirement account would, but there’s no limit on how much you can contribute or withdraw from them.
A great comparison site we use to cross-compare financial products is Nerdwallet.com. Search “top brokerage accounts” or “top robo-advisors 2019” and you’ll be able to read and compare options like Betterment and Wealthfront, two popular robos used by several ElleFactor women.
Remember, with a non tax-advantaged account you can contribute as much as you like and have that money available to you for whatever your pre-retirement goals might be.
How do I figure out how much to contribute to each?
We’re taught to max those retirement contributions and figure the rest out. When in reality, the right mix is specific to your goals and how much money you can contribute. And that’s why we exist, because we recognize it’s not easy breezy to figure that out without more info.
But if you are someone who can maximize your contributions to your tax-advantaged account (in 2019, the max IRA contribution is $6K and the max 401k contribution is $19K) and have enough left over for your short-term goals, more power to you.
If you have a large short-term goal coming up, like a down payment or a business you’re starting, you probably want to allocate less to retirement and more to the taxable account so you have that cash available to you sooner.
We always recommend starting at the end. How much money do you need, by when? Take a look at how much you’re squirreling away per month (this is called your savings rate and we love to help you strengthen it so there’s plenty for your various goals!) and divide accordingly.