HUNTSVILLE, Ala. — The best place to stash your money depends on a variety of factors, including when you need the money and how willing you are to take risks with your funds. Here are seven places you can save your money based on your financial situation and goals.
1. High-Yield Savings Account
If you have short-term financial goals, such as a home down payment or family vacation, or you want to start an emergency fund, it's often best to put those funds in a high-yield savings account. These accounts typically offer higher interest rates than traditional savings accounts. What's more, there's no risk of losing money, and you can typically access your funds whenever you want.
That said, high-yield savings account interest rates generally aren't even high enough to beat inflation, so they're not well-suited for long-term savings goals. Also, some banks and credit unions may limit how many withdrawals you can make each month, so they may not be best for funds you plan to draw on frequently.
2. Employer-Sponsored Retirement Account
If your employer offers a 401(k), 403(b) or 457 retirement plan, it can be a good starting point for your retirement savings, particularly if your employer offers a matching contribution.
Depending on the plan, you may be able to make contributions with pretax dollars, which means you won't owe taxes on what you put into your retirement account. The catch is that you'll pay taxes on any withdrawals you take in retirement.
Some employers may also offer Roth plans, which require after-tax contributions, but your money will grow tax-free. Annual contribution limits for employees (not including employer matches) are $20,500 for 2022 and $22,500 for 2023.
Regardless of the plan type, if your employer is willing to match your contributions up to a certain amount or percentage of your salary, that's an immediate 100% return on your contributions, so it's a good idea to take advantage of that perk.
Just be sure to check if your employer has a vesting schedule for employer contributions and what that looks like. In some cases, you won't actually benefit from your employer's matching contributions unless you remain with the company for a set period of time.
3. Individual Retirement Account (IRA)
Employer-sponsored retirement plans can be a great way to start saving for retirement because they're convenient—contributions come out of your paycheck automatically—and your employer may match some of your contributions. But the investment options, fees and other features are dependent on the plan provider your employer chooses. And, if your employer doesn't offer a retirement plan, you'll need to choose an option that's open to you.
If you want more control over your retirement investment options, fees and other features, and you're maximizing your employer's contribution match, then consider an individual retirement account (IRA) for other retirement planning.
As with employer-sponsored plans, you can opt for a traditional IRA and make contributions you can deduct from your income when filing taxes. Or you can choose a Roth IRA that requires after-tax contributions but allows your money to grow tax-free.
Note, however, that the tax benefits for IRAs are dependent on your income. Higher-income individuals may get reduced benefits or none at all. Also, IRA contributions are limited to $6,000 in 2022 and $6,500 in 2023.
4. Health Savings Account (HSA)
If you have a high-deductible health plan, you may be eligible to contribute to a health savings account (HSA) to prepare for upcoming or unexpected health care costs. Not only can you deduct HSA contributions on your tax return, but you can also invest that money and take tax-free withdrawals to cover qualified medical expenses.
Additionally, you could use an HSA as another tax-advantaged retirement account once you max out your employer-sponsored plan and IRA contributions. While you typically get slapped with a 20% penalty plus income taxes if you take money out of an HSA for non-qualified expenses, that penalty is waived once you reach age 65. At that point you'll just have to pay income taxes on your distributions.
Keep in mind, though, that if you switch to an ineligible health plan, you won't be able to contribute to an HSA. Also, annual limits are $3,650 for a self-only health plan or $7,300 for family plans in 2022, and $3,850 for self-only plans and $7,750 for family plans in 2023.
5. Certificate of Deposit (CD)
A certificate of deposit (CD) is a deposit account that can offer interest rates that compete with or even beat high-yield savings account rates. In exchange, you'll typically need to lock up your money for a predetermined period of time until the CD matures.
So, if you have a savings goal with a specific end date and you don't need access to that money until then, a CD could be a good way to keep your money safe while earning a decent yield.
Depending on the financial institution, CD maturities typically range from a few months to several years, with each one offering a different yield on your money. If you take your money out early, though, you may face a penalty, which can vary depending on the account's maturity.
6. Money Market Account
A money market account can be another good way to stash money for short-term savings goals without sacrificing your liquidity as you would with a CD.
Like high-yield savings accounts, money market accounts can offer higher yields than traditional checking and savings accounts. Additionally, money market accounts may come with a debit card and paper checks, making it easier to access your funds, especially if the account is with a different bank or credit union than the one you use for your everyday banking needs.
That said, some financial institutions may limit how many withdrawals you can make each month, so they may not be ideal for accounts you plan to use regularly.
7. Brokerage Account
If you don't have a specific goal for certain money, or you simply want to grow your net worth over time in general, a brokerage account can be a good way to do that.
Within a brokerage account, you can invest in stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts and many other assets. Some investment options are riskier than others, and you may lose money depending on how you invest it. But if you develop a good investment strategy and diversify your portfolio well, you can grow your money over time.
The Bottom Line
Knowing where to put your money can be challenging, especially if you don't have clear, defined goals. Take some time to set and prioritize your financial goals, then research which accounts to use to make the most of your money. This process can take some time, and your goals and methods may evolve over time, so be sure to evaluate where you stand and what you want to accomplish regularly to keep your financial plan going.