Which Account Should I Choose?

The good and bad thing about personal finance is one thing: its personal. That is good because it means you can tailor your choices to fit your exact needs. But if you are a person who gets confused and overwhelmed at the variety of choices and is not sure which one is the right one for you, you may find yourself wishing there was a template of personal finance choices you should follow. Well, no problem! Remember, everyone’s situation is different but here’s a template with general rules to guide your choices on some basic personal finance decisions.

Traditional IRA or Roth IRA?

Choose a traditional IRA if you have high or moderately high income and need tax deductions. Contributions to traditional IRAs may be deductible though income limits apply and are phased out if you have an additional retirement plan at work. The growth in the account is tax-deferred, so you only pay taxes on the growth when you withdraw it in retirement. When you reach 70 ½ , you will have to take required minimum distributions from the IRA account, though you can take more than the minimum with no penalty.

A Roth IRA is recommended if you have a lower income now (and thus lower tax rate) but may have a higher income in the future, thus they are usually recommended to younger investors. There are income and contribution limits (which are phased out with increasing income) for a Roth IRA and contributions are not deductible. Contributions are already taxed before they are made to the account and the growth is not taxed when it is withdrawn. There are no required minimum distributions even after you reach retirement age.

Whole Life Insurance or Term Life Insurance?

Whole life insurance essentially builds up a savings account and thus is expensive, but it lasts the lifetime of the account holder and can be passed onto a beneficiary. It is best for those with a stable, high income, want to build savings, and want insurance to last a lifetime. Term life insurance is true insurance that only covers the account holder for a set term limit before it expires, does not build up cash value, but is much more cost effective. It is best for younger people with lower or less stable income who want pure insurance, usually for coverage while they have young children.

529 Plan or UTMA?

A 529 college savings plan is a good choice for parents who have any belief their child will go to college. The funds grow in the account tax free if they are used for qualified educational expenses. If, however, the funds are removed and spent on non-educational expenses, there is a penalty imposed. Funds can be transferred to a sibling if needed and can be withdrawn penalty free in the same amount of grants or scholarships your kid receives.The account is owned by the parents, not the kid. While you can choose a 529 plan from any state, you are limited in choosing how the funds within the phan are invested.

Choosing a Uniform Transfer to Minors Act (UTMA) account is good if you need greater flexibility for the use of the funds for non-educational purposes. The account will be in the name of a minor child and they own the account, though a parent is also on the account as a manager. The first $1,050 of growth in the account is tax free and after that it is taxed at the child’s tax rate, rather than the adult’s rate, which can offer significant savings. The funds in the account can be invested with greater flexibility and the parent can choose any of a large number of funds to invest in. The funds can be also used with greeted flexibility and can be used for any number of purposes as there are no use restrictions on them.

Online Bank or Traditional Bank?

An online bank offers 24/7 access and flexibility to deposit anywhere just from your phone. They often have higher interest rates for savings accounts due to their lower overhead. You may need to wait 3-4 days to receive your money when you withdraw it into another account or have a check mailed to you, and you may have to pay a fee to use another bank’s ATM. Most are FDIC insured but you will want to confirm before you open an account. A traditional bank will offer much of the same flexibility to bank online and deposit from your phone, but they will also offer easier access to your funds and cash via bank-owned ATMs. Traditional banks usually have a lower interest rate for savings accounts but are all FDIC insured. The best solution is a mix of both. Open an online savings account to take advantage of the higher interest rate and use a traditional bank for your checking account to transfer money in and out of. Plus, having your savings account at an online bank makes it just a little harder to access, furthering the goal of keeping money in the account for a rainy day.

These are just a short list of the types of accounts you can choose as you make your personal finance choices. There are as many individual finance needs as there are individuals. While we can offer some guidance on making a decision on when to choose which types of accounts, no guidance is one size fits all. Working with a financial planner can help you navigate the complicated decisions and understand all the account options that work best for your financial future.

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