Saving & Investing - Head Matters

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5. Types of Accounts

b. Taxable vs. tax-advantaged tools (continued)


     Common Savings and Investment Tools 
 Tool Where to find it  What to look for  Advantages  Disadvantages  Tax advantages 
Savings accounts Banks and credit unions Interest rates, FDIC/NCUA Insured  Safe (usually FDIC/NCUA guaranteed), easy to access, good for emergency fund  Typically earns very low interest  None 
Money market accounts  Banks and credit unions  Interest rates, FDIC/NCUA Insured  Safe (usually FDIC/NCUA guaranteed), easy to access, interest usually rises as interest rates rise, good for emergency fund  Typically earns very low interest, may require higher minimums to open account None
Certificates of deposit (CD) Banks and credit unions Interest rates, terms, FDIC/NCUA Insured safe (usually FDIC/NCUA guaranteed), pays higher interest rate than savings and money market accounts, can lock in interest rate for the term of the CD not good for Emergency Fund because most charge penalty for early withdrawal None
Stock mutual funds Mutual fund companies or brokerages Management of fund, track record, company offering fund, investments in the fund Potential to earn a higher return than other types Greater market risk than other types Earnings may come from capital gains and dividends which have lower tax rates
Bond mutual funds Mutual fund companies or brokerages Management of fund, track record, company offering fund investments in the fund Potential to earn a higher return than other types Greater market risk than other types Only small amount of earnings may be taxed at lower rates.
Money market mutual funds Mutual fund companies or brokerages Management of fund, track record, company offering fund investments in the fund easy to access, interest usually rises as interest rates in the economy rise, good for emergency fund Usually low paying, not FDIC guaranteed None
Commodity indexes and other alternative investments Mutual fund companies or brokerages Management of fund, track record, company offering fund investments in the fund Potential to earn a higher return than other types Greater market risk than other types, higher risk than most investments Earnings may come from capital gains and dividends which have lower tax rates.
Individual stocks and options Brokerages Return is dependent on financial future of company and economy, and timing of buying and selling Potential to earn a higher return than other types Greater market risk than other types, higher risk than most investments Earnings may come from capital gains and dividends which have lower tax rates
Individual bonds and other fixed income Brokerages Return is dependent on financial future of company, timing of buying and selling. Potential to earn a higher return than other types Greater market risk than other types Only small amount of earnings may be taxed at lower rates.
Brokered certificates of deposit Brokerages Interest rates, terms, FDIC/NCUA Insured Safe (usually FDIC/NCUA guaranteed), pays higher interest rate than savings and money market accounts, can lock in interest rate for the term of the CD Most charge penalty for early withdrawal None
529 College Savings Accounts

CollegeInvest
Financial advisor or state-run 529 college savings program Return and risk depend on types of investments offered Potential to earn a higher return than other types Limitation of investment options tax-deferred and tax-free if used for qualified college expenses, CollegeInvest offers CO state tax deduction
Coverdell Education Savings Accounts Brokerages Return and risk depend on types of investments offered Potential to earn a higher return than other types, can be use for K-12 education as well as higher education Lower limits on contributions allowed tax-deferred and tax-free if used for qualified college expenses
UTMA/UGMA Brokerages and banks Return and risk depend on types of investments offered Potential to earn a higher return than other types Funds considered student owned, could reduce student aid a portion of earnings may be taxed at the lower, child's rate, depending on family income level.
US Savings bonds Banks and U.S. Treasury Should be in parents name if for college purposes Government guaranteed, higher return than money markets, fixed rate of interest Low, usually fixed interest State and local tax free

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