Types of Accounts for Investing and Retirement

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1. Put your money to work for you.

Now that we know inflation is slowly chipping away at the value of our money, we realize that we need to put our money somewhere where it can beat inflation; we need to invest it. There are many different ways that you can ‘invest’ your money, from putting it into the stock market, to directly investing money into a business that a friend is launching, to purchasing a piece of real estate. This guide will focus on one main category of ‘investing’, and it’s the one you usually hear about the most: the stock market.

2. “Tax-advantaged” accounts give you the opportunity to choose when and how you get taxed, which is a powerful choice.

All income that you earn is subject to tax by the federal government. But in ‘tax-advantaged’ accounts, you can choose when and how you are taxed. Why exactly? The federal government incentivizes retirement, health, and education savings, as ultimately they have a positive effect on the US economy. They incentivize it by allowing you to be exempt from tax or choose when you get taxed on that money. The accounts that allow you to do this are called “tax-advantaged accounts”. Some good examples are 401k’s, 403b’s, IRA’s, HSA’s, and 529’s. By contrast, there are accounts that offer no tax benefits, known as “taxable accounts”. Some examples of those are checking and savings accounts and brokerage accounts. For most people, your first experience in managing money involves checking and savings accounts. While these accounts are useful tools for everyone, they don’t offer the tax benefits found in tax-advantaged accounts, which are crucial for any good retirement savings strategy. We will cover all of these accounts in this Personal Finance Guide.

3. Retirement accounts can be simply categorized in two ways: a) employer-provided or individual AND b) pre-tax or post-tax.

These categories result in 4 different retirement accounts:

1. First, we can categorize retirement accounts as employer-provided retirement accounts (like a 401k or a 403b) or individual retirement accounts (also known as IRAs). Both have pros/cons, and you can have both types of accounts. 
2. Second, we can further describe a retirement account by referring to whether the money contributed to this account is already taxed or not yet (referring to federal income tax). For example, a Traditional IRA is money that has not been taxed (aka pre-tax or tax-sheltered), and Roth IRA is money that’s already been taxed when you first earned it (aka post-tax).

Combining these categories, we come up with 4 main retirement savings accounts available to most goers.

Luckily, this chart is pretty simple! If working for a for-profit company, you would have the option to contribute to a 401k instead of a 403b. So when you are putting money away for retirement, you are primarily choosing between contributing to these 4 accounts, which each provide unique benefits. Most people don’t have all 4 types of accounts but rather choose to contribute mainly to just 1 or 2 of these.

4. Here’s how 403b’s and IRA’s are different.

	403b	IRA
Annual contribution limits  (for 2022)	$20,500 per individual	$6,000 per individual
Where the account is hosted (the financial institution)	403b accounts are administered by a financial institution that your employer has chosen. Employees don’t have any say in which company their employer chooses.	Anywhere you want with a bank that offers IRAs. This guide recommends Vanguard for its low fees and customer-oriented business model. You can also move your IRA to another financial institution at will.
Investment options	You (the investor) are limited to the investment options outlined by the 403b plan documents. Often, 403b plans will have fewer investment options, between 20-100 funds, rather than the ability to invest in the entire stock market.	You can invest your money in anything available on the stock market (thousands of stocks, mutual funds, index funds, and more).
Your access to the money	Access to your money in the 403b account is very limited. Typically, you can’t move it out of the account unless you stop working for your current company or you reach 59 ½ years old.	Money in your IRA is relatively more accessible than a 403b. Specifically for Roth IRAs, the money you contributed to your Roth IRA is accessible. If needed, you could pull out any money that you contributed to it, without any penalties or tax. Withdrawing earnings, however, is subject to a 10% penalty until age 59 ½.

A first glance at the comparison would tell you that an IRA might be better because you have more flexibility with your money. Also, you have the opportunity to host that IRA with a low-fee financial institution, and fewer fees mean more money invested in the long run (more on that in the Investing section.) However, if you save more than $500/month ($6000/year), then you would have more money to invest elsewhere after ‘maxing out’ your IRA. That’s one of the main advantages of the 403b – the higher contribution limits means that you can save even more for retirement.

The important thing is to have a plan of where you will make retirement contributions and in what order. For example, an individual might invest their first $6000 annually in their Roth IRA. But they might also try to invest between $3000-6000 more in their Roth 403b if possible. Or, another person may contribute to their 403b as their primary retirement account and then just put any money leftover in their checking account into their Roth IRA at the end of each quarter as an ad-hoc additional investment.

5. Here’s how Traditional and Roth accounts are different.

If you open a 403b account through your employer, or an IRA with another banking institution, how do you choose whether to make Traditional contributions or Roth contributions to that account? Let’s take a 403b account for example.

	Pre-Tax (“Traditional”) 403b	Post-Tax (“Roth”) 403b
During Contribution	You don’t pay tax on traditional contributions. Said another way, your tax bill is lower on the year when you make these contributions.	You first pay tax on Roth contributions. This means there are no tax benefits in the year you contribute.
During Growth	The money in the 403b grows without incurring any tax	The money in the 403b grows without incurring any tax.
During Withdrawal	You pay tax on all of the money you withdraw. It becomes part of your income and it’s taxed like any other income. Only accessible after age 59 ½.	You don’t pay tax on withdrawals of your original contributions or earnings, after age 59 ½. If you withdraw earnings before this age, you would pay a penalty.

The truth of the matter is that you are liable to pay a tax, either way. At first glance, it appears to just be a decision on when you will pay it. However, there are legal strategies to avoid paying this tax entirely, some of which are outlined in this guide. Technically, studies show that (all other things being equal) you’ll pay less tax by funding a Roth account than a Traditional account. Roth accounts were only started in 1997, so they haven’t been around very long. If you think about it, there’s a certain sense of peace knowing that with a Roth account (whether it’s a Roth 403b or a Roth IRA), all of that money is yours, never to be taxed again. Many people choose to invest everything they can into Roth accounts for this peace of mind. Many goers might also prefer Roth accounts, but because of our unique situation living overseas, we have other options to consider and other investing superpowers to learn.

6. People living outside the US cannot contribute to IRAs, IF they have no taxable earned income.

So all of this sounds great until you start to factor in the fact that goers live overseas. Most years, because goers live overseas, we will claim the Foreign Earned Income Exclusion (FEIE), which allows for most/all of the money we earned outside the US to not be subject to federal income tax (more on this in the Taxes section.) That’s a really nice perk of living overseas! But if we file our taxes and claim the FEIE, we become ineligible to save in certain retirement accounts for that calendar year. Specifically, IRAs require that you make taxable earned income in order to contribute to an IRA in that year. So while Roth IRAs offer so many benefits, you can only contribute to them in years when you have taxable earned income.

If you take trips to the US while still living overseas, then the income you earn during those trips is not excluded with the FEIE and you will be liable to pay federal income tax on that amount. That is taxable earned income, which means that you would then be eligible to contribute that amount to your Roth IRA in that calendar year. A 10 day trip or 6 month trip to the US is an opportunity to fund your Roth IRA. You’ll have to do the math on your taxes to calculate your foreign-earned income and US-earned income. goerFI is currently working on calculator resources for goers.

If you make enough US-earned income in a year to max out your Roth IRA contributions, but less than the standard deduction, then you have exercised one of your goer investing superpowers! With the FEIE excluding the majority of your income from federal income tax, the standard deduction eliminates your tax liability on the US-earned income portion. You max out your Roth IRA and pay no federal income tax on it, or on any of your US-earned income. As a goer, your contributions to a Roth IRA might be sporadic: some years you can, some years you can’t. But when you can…do it!

7. People living outside the US can still contribute to their 403b, even if they have no taxable earned income.

8. Brokerage accounts are not ‘tax-advantaged’, but very useful.

Brokerage accounts are also used for investing in the stock market but gains in a brokerage account are subject to capital gains tax. However, capital gains tax rates are more favorable than income tax rates, so it is possible to have a capital gains tax bill of $0 when you are in the 0% capital gains tax bracket.

If you sell a holding within a brokerage account less than 365 days after you bought it, the gain made on that holding will be subject to short-term capital gains tax, which is not favorable. The goer investor wants to hold those investments for more than 365 days before selling, to trigger long-term capital gains tax instead.

While there are no tax advantages in brokerage accounts, there ARE effective tax strategies you can use in brokerage accounts to limit your tax liability. One great strategy to be aware of is Capital Gains Harvesting. This is where you purposefully ‘harvest gains’ by selling your positions and rebuying at a higher price. Make sure to only do this after holding the investment for 365 days though! This is a ‘taxable event’ and you will be subject to pay long-term capital gains tax on the growth in the year that you harvest the gains. However, if you pay attention to the long-term capital gains tax brackets, you can harvest only up to the upper limit of the 0% bracket, and owe no capital gains tax.

The main benefit of brokerage accounts is ultimate flexibility; you can put money into and pull money out of a brokerage account at any time. Because of their flexibility, brokerage accounts are an effective tool for the goer investor, in addition to 403b’s and IRAs.

9. 529’s for your kids college.

529s are a common tax-advantaged account that can be useful for parents saving for their children’s education. This guide won’t cover 529s in detail, but you can read more about 529s here. Alternatively, another way to approach the large expense of college is to use Roth IRAs instead of, or in addition to, 529s.

10. HSAs (Health Savings Accounts)

HSAs are another less-common tax-advantaged account, available only to people who have high-deductible health insurance plans. It is an account that is tax-free going in and tax-free coming out, eligible only to use on qualified medical expenses. HSAs are not commonly used by people living outside the US, so this guide won’t discuss them in detail. 

11. Be sure to designate beneficiaries for all investment and bank accounts.

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1. Have a brokerage account so that you can invest money in the stock market but keep that money more accessible than in retirement accounts. Money in a brokerage account can be later moved to a Roth IRA, donated to charity, or withdrawn for an upcoming large purchase/expense. This is in addition to a 403b and IRA, not in place of those accounts.

2. Money invested in a brokerage account should be kept in an investment for more than 365 days to be considered ‘long-term’. Long-term capital gains tax is often 0%, but short-term capital gains tax is higher. You don’t have to worry about capital gains tax for IRAs or 403b’s, where you can buy or sell stocks and index funds anytime. 

3. Spouses can contribute to IRAs in each spouse’s name, even if only one spouse earns an income. So technically a married couple can contribute a total of $12,000 annually to Roth IRAs.

4. Making a short trip to the US? Calculate how much income you’ll make during your US trip. That amount will be subject to federal income tax, and you will also be eligible to contribute that amount to your Roth IRA. 1-3 month trips to the US will usually generate less income than the standard deduction, meaning that you will likely still not pay tax on the small amount you earned in the US. This is also a superpower. You could withdraw money from your brokerage account to contribute to your Roth IRA.

5. Have old 401k or 403b accounts from previous employers? You can perform a “rollover” to move that money from the old 401k or old 403b into an IRA. If the existing money is Roth money, you’ll rollover into a Roth IRA. If the existing money is pre-tax money, you’ll rollover into a Traditional IRA. Once in the IRA, you’ll have more investment options and will likely pay fewer fees.

6. Every year, increase the monthly amount you save in your 403b, IRA, or brokerage accounts. Increasing your savings rate each year is a strong practice that prevents lifestyle creep. Have a goal of ‘maxing out’ your retirement account contributions, whenever possible.

7. Some employers offer ‘matching contributions’ to your 403b. This is free money! Contribute whatever you need in order to receive this benefit. If your employer does not offer it, ask them to consider adding this as an employee retention benefit.

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1. For your bank accounts:

2. For your 403b account:

3. For your IRA account:

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Don’t just take our word for it! Check out these other resources.

This page last updated April 2022