A Smart Savings Plan for Every Need

Close up of women using calculator to determine expenses for things like car insurance, mortgage, health, travel, managing savings account

College costs, a home of your own, a comfortable retirement or just saving for a rainy day…there are plenty of reasons to implement a smart savings plan. While a simple savings account can be a fine choice, it makes sense to explore your options and choose the investment vehicle that best serves your financial needs. A great place to start: familiarize yourself with these common investment terms:

401(k) Retirement Accounts

A 401(k) is a retirement savings plan that is sponsored by your employer. Check with your human resources department for availability and details. With a 401(k), you can invest a percentage of your salary, which is taken directly from your paycheck pre-tax. Some companies may even match a portion of your contributions. Annual contributions to a 401(k) are limited ($19,500 maximum for 2020, or $26,000 for those 50 and over), but there is no minimum contribution. Required distributions start at age 70 ½, and there is a 10% penalty imposed for withdrawals before age 59 ½.

529 Plans: Education Savings Plan

Money in a 529 savings plan can be used to pay for college expenses at an accredited institution, including tuition, fees, books, supplies and room and board. Earnings are tax-deferred and withdrawals for qualified expenses are free from federal income tax, as well as some state taxes. A nice plus: once you set up a 529 account, grandparents and others can contribute monetary gifts into the account.

Bonds

A bond is a debt security, that is, funds borrowed by a corporation or government entity. Bonds are rated from AAA to D (in default). Bonds usually offer attractive interest rates, but your funds may be inaccessible for a specified term (usually 1 to 5 years), with a penalty incurred for early withdrawal before maturity.

Certificates of Deposit (CDs)

A CD account is a savings plan that requires you to invest your savings with a bank for a specified period of time, which can range anywhere from 30 days to 5 years. You'll get a higher interest rate than a standard savings account but will face penalties for early withdrawal.

IRA (Individual Retirement Account)

An IRA account is a retirement savings plan offered by a financial institution. The contribution limit in 2020 is $6,000, $7,000 if you are 50 or over. With a traditional IRA, contributions and earnings are tax-deferred until retirement. Contributions to a Roth IRA are made with after-tax dollars, but the money grows tax-free and no income tax will be due on withdrawals after age 59 ½.

Money Market Savings Accounts

Money market savings accounts typically offer a higher interest rate than standard savings accounts. The downside: such accounts usually require a larger minimum deposit, and you'll incur a fee if your balance falls below the required minimum. Most money market accounts allow you to easily withdraw your cash, but some will limit the number of monthly withdrawals.

Mutual Funds

With a mutual fund, your contributions are pooled with money from other individual investors to purchase a portfolio of stocks and/or bonds. The portfolio is managed by a professional investment advisor. Investing in a mutual fund is a useful way to diversify your investments, and to take advantage of the expertise of the investment manager. Some mutual funds may charge transaction fees.

Savings Accounts

Standard savings accounts typically have low-interest rates but allow easy access to your funds. Be sure to inquire for special accounts available to students and seniors, many offering low or waived fees.

Stocks

A stock is a security that represents an ownership interest in a company. The number of shares that you possess represents the level of ownership in the company. Stock prices fluctuate, and the price is determined by supply and demand on the market.