30 Day Investing Challenge, Day 12: Best Accounts For Long Term Goals
Ah, long term goals. These are the fun ones. The ones that seem like pipe dreams because they’re so big and so far away. Saving $1 million, retiring early, building your dream home, taking a year or two off work and traveling the world, putting all 4 of your kids through college… they’re endless! For most people these goals will take 10+ years to reach. And that’s fine! Enjoy the journey. But it’s a good idea to have a plan for how you’ll reach your long term goal. The first step is knowing which accounts work best for these. One caveat: these accounts sometimes require creative thinking, especially if you want to access the money earlier or in a different way than the account intended. Let’s explore:
Workplace Retirement Plans or Traditional IRA
You may be thinking that these accounts are only good for retirement, but actually you can hack them in a way that allows you to access the money earlier than 59 1/2 (the current age you can access 401k, IRA, or other retirement account money). I’ll talk about this hack in a later challenge, but keep it in the back of your head that you don’t only need these accounts for retirement age. If your long term goal is retirement, whether early or at the standard age, make sure you’re taking advantage of your workplace retirement account.* If you don’t have one, open up a traditional IRA. It’ll do the same job and help you save for retirement in a tax advantaged way.
Roth IRA
This account actually is great if the long term goal you’re thinking of is retiring at 59 1/2 or older. When you contribute to this account you pay taxes on that money going in, but you’ll never pay taxes again. Not on the gains and not when you pull it out (as long as it’s after 59 1/2). And you have the added benefit of always being able to access the principle balance, which means the money you contributed to the account (you can’t access the gains until 59 1/2 without incurring penalties). So if one of your long term goals is retirement, open this kind of account.
Health Savings Account (HSA)
I friggin’ LOVE these accounts. I wish they’d considerably increase the contribution limits because this is where I’d put all my long term savings. HSAs are available to you if you have a qualified, high deductible health plan. How do you know if you’re qualified? You can start by calling your plan administrator and many times it’ll say directly in the plan name whether it’s HSA eligible. Often times if you get healthcare from your workplace they’ll have a HSA account ready for you when you sign up. So, why are HSAs so awesome? Basically you get a “triple win” tax effect: you contribute money tax free, your money grows tax free, and then when you pull your money out to pay for qualified medical expenses you don’t pay taxes. So why is this account great for long term goals? There’s a really cool hack called “shoeboxing” that allows you to use this account as a tax sheltered investment vehicle that you can access anytime. I’ll show you how when I post the challenge on the HSA shoebox method, so stick around.
529 Plan
This account is specifically for parents who want to help their kids with their education. It’s a tax advantaged plan designed to cover these costs. It was recently expanded in 2017 to cover all kinds of education, not just college: K-12 private schools, apprenticeships, trade school, and more. There are two types of 529 plans: education savings plans and prepaid tuition plans. Education savings plans grow tax-deferred and withdrawals are tax-free if they're used for qualified education expenses. Prepaid tuition plans allow you to pay current tuition rates for future attendance at designated colleges and universities. This means you could potentially lock in a lower cost for higher education. This is a great plan if your goal is to help your child (or children) with their education costs.
Brokerage Account
Seriously, by now you should just open one of these babies up. They really are the ultimate account that can meet any short, medium, or long term need.
Action Steps: Open Your Accounts (if you haven’t already)
Check and see if you have a workplace retirement account. Write down the name of the firm that administers your plan. If you’re not contributing yet, don’t worry: we’ll get to that step. Also see if they offer a match of any kind and note this down as well.
Open a Roth IRA at the brokerage firm you chose on challenge day 9.
Find out if you have access to a HSA either through your workplace or based on the type of health plan you have. If you do have access and you haven’t opened one yet, Fidelity’s HSA** is a great option.
If you have kids, open a 529 plan. Here is a list of the best options as of April 2024.
Seriously, open a brokerage account. You can open one at the firm you chose on challenge day 9.
I’ll see you here tomorrow for your next challenge: Knowing what a stock is.
*Note: if you want to take advantage of hacks to access your money before 59 1/2 make sure you’re using pre-tax or tax advantaged workplace retirement plans, not Roth or post-tax. I’ll explain in the challenge about this topic.
**This is not an affiliate link.
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