Retirement & Savings FAQs Alphabet Soup

Retirement Accounts–put your money away early and often!

1. Regular IRA

IRA stands for Individual Retirement Account and is set up by you, not your employer.  You get to deduct what you contribute, i.e. reduce your taxable income by what you put into your regular IRA.

With a regular IRA, you put in “pretax” dollars, and deduct what you put in, and you get to grow the account tax free–i.e. you don’t pay capital gains when you sell a stock at a profit and buy a new one, BUT you then have to pay regular income tax when you start taking money out during retirement. Regular income tax rates can be DOUBLE capital gains income tax rates.

As a young groom, your tax rate is likely low, so deducting this against your income is not the best benefit. Using a Roth IRA (explained more below) is likely a better bet when you are young.

2. SEP IRA

SEP or Self Employed IRA, is an individual retirement account. It is like a regular IRA, in that you get to deduct what you put in against your current taxes, but with a SEP IRA you can put in more, thus deduct more.

Like a regular IRA, you put in “pretax” dollars, and deduct what you put in, and you get to grow the account tax free–i.e. you don’t pay capital gains when you sell a stock at a profit and buy a new one, BUT you then have to pay regular income tax when you start taking money out during retirement. Regular income tax rates can be DOUBLE capital gains income tax rates.

3. Roth IRA

Unlike traditional IRAs and SEP IRAs, the contributions to a Roth IRA are made with after-tax income. 

Like a traditional IRA, the Roth allows you to defer tax on any dividends and capital gains in the account. Then when you take a qualified distribution, it’s tax-free. While there are technically income restrictions on contributing to a Roth IRA, you can legally get around them by opening a backdoor Roth IRA. Here’s hoping one of your grooming side gigs made you so wealthy that you need to open a special kind of Roth IRA!

If you can start investing early, then consider using a Roth IRA or Roth 401(k) where you invest AFTER-TAX dollars into the fund, but then you grow it for decades and pay no tax when you take the money out for retirement.  

Peter Thiel, a tech billionaire and one of the founders of PayPal, famously turned $2,000 into $5 billion using a Roth IRA. He will never pay taxes on that $5 billion because he invested after-tax dollars in startup shares using his Roth IRA. 

You have your entire life ahead of you, so invest focused on growth, i.e. mostly stock market ETFs (see the article on growing wealth for more on ETFs).

4. Solo 401(k)

Solo 401(k)s are a retirement savings option for small businesses, including LLCs and corporations, whose only eligible participants in the plan are the business owners (and their spouses if they are also employed by the business). It can be a smart way for someone who is a sole proprietor or an independent contractor to set aside a decent-sized nest egg for retirement.

Be sure to read the rules in full, to see if you qualify. If you have the opportunity to contribute more to retirement, the solo 401(k) might be a great route for you.

Some solo 401(k)s are also Roth 401(k)s, in that you can contribute after-tax dollars and not pay taxes on the gains in the account when you remove the money decades later. The only trick here is that not all plan providers, i.e. those like Fidelity Investments, that offer solo 401(k)s, offer these in the Roth version. But Google and call around, as it will pay off years from now!

Example Comparison of Retirement Account Contributions

Account	Elective Deferral	Maximum Employer Contribution	Catch-Up Contribution
Solo 401(k)	$20,500 for 2022 $22,500 for 2023	25% of compensation or 20% in the case of a sole proprietor or a Schedule C taxpayer	$6,500 for 2022 $7,500 for 2023
SEP IRA	Not Allowed	25% of compensation or 20% of modified net profit for unincorporated business owners	Not Allowed
Profit-Sharing or Money-Purchase Pension Plan	Not Allowed	25% of compensation or 20% of modified net profit for unincorporated business owners	Not Allowed
SIMPLE IRA	$14,000 for 2022 $15,500 for 2023	3% of compensation/income	$3,000 for 2022 $3,500 for 2023

Regular, non-retirement accounts

5. Checking Account

A checking account lets you easily make withdrawals, deposits and fund transfers, including ACH and wire transfers. If you can, try to use ACH as it is often just as fast, and it’s free vs a $30 charge for wire transfers. 

Checking accounts can be accessed using checks, automated teller machines (ATMs), electronic debits, and debit cards. 

They are best used to keep money for short-term expenses.

6. Savings Account

A savings account at a bank is Federal Deposit Insurance Corporation (FDIC) insured and earns interest. Though they don’t pay high interest, they make up for that with their safety (backed by the FDIC, even when the bank fails, your funds under $250,000 are insured by the government).

Savings accounts sometimes have limitations on how often you can withdraw funds (mine says I can’t move money from savings to checking more than 5 times per month).  Savings are ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or putting surplus cash from your checking account into savings so it can earn a little interest.

7. CDs (Certificate of Deposit)

A certificate of deposit (CD) is a savings product that earns interest on a lump sum for a fixed period of time. CDs differ from savings accounts because the money must remain untouched for the entirety of their term or risk penalty fees or lost interest. CDs usually have higher interest rates than savings accounts because you have to leave your money locked up.

CDs may not be affordable for grooms because they sometimes have larger minimums. Not to worry, most of the time money market funds have similar interest rates and zero minimums through brokerages like Fidelity Investments and Schwab.

8. Money Market Funds

Whenever I think about putting money in a CD or savings, I compare the rates with money market funds. I wasn’t the only one! At 1% for a money market versus 0.5% for a bank, it’s not worth the trouble of moving the money. So banks got lazy (and greedy). At 5% for a money market fund versus 1% for a bank, now that’s real money, and people and companies started moving money out of banks and into money market funds.

What is a money market fund?

The same way an ETF (exchange-traded fund) or mutual fund invests in stocks and bonds, money market funds should invest in assets that are easily exchanged into cash (thus money market versus stock market versus bond market). Money market funds are so close to cash with a small return, that when they go “bad” it is called “breaking the buck” because they should trade at $1, like cash, and give you some interest payments for your investment.

HOWEVER…

After years of low interest rates, money market funds, which historically invested in short term government bonds (called T-bills or treasury bills) at near zero rates, weren’t attracting investors with these low rates. So these funds started investing in commercial paper (loans to businesses which are less likely to pay back than the government), and when markets get nervous about the economy, these money market funds would “break the buck”… all of a sudden, they are not good savings vehicles.

What to Check?

Make sure the money market fund you invest in only holds GOVERNMENT short term paper, i.e. T-Bills. Not T-Notes (medium term), or T-Bonds (long term; 20-30 years) both of which can go down when interest rates or market nerves (risk) rises.

ETFs can be purchased in fractions, so they are affordable for grooms through large brokerage houses with zero minimums, like Fidelity Investments and Schwab.

9. ETFs

An exchange-traded fund (ETF) is a type investment security that tracks a particular index, sector, commodity, or other assets, but unlike mutual funds, ETFs can be purchased or sold on a stock exchange the same way that a regular stock can, thus it is a fund that is traded on an exchange, an exchange-traded fund (ETF). 

An ETF can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. ETFs can even be structured to track specific investment strategies.

The first ETF was the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, and which remains an actively traded ETF today.

ETFs can be purchased in fractions, so they are affordable for grooms through large brokerage houses with zero minimums, like Fidelity Investments and Schwab.

10. TreasuryDirect

TreasuryDirect is an online platform that allows individuals to buy and manage U.S. government securities, including Treasury bills, notes, bonds, and inflation-protected securities with ZERO fees. The benefit of zero fees is less today, as most large brokerages like Fidelity Investments and Schwab have moved to nearly zero fees.

TreasuryDirect is favored by some of my more sophisticated friends who want to buy and manage Treasury securities directly from the U.S. government without needing a broker or intermediary. You can also manage your investments online, including reinvesting your interest payments and rolling over matured securities.

Since Treasury securities are backed by the U.S. government, they are considered very safe investments.

Opening an account and buying bonds on TreasuryDirect is a simple process that can be completed by following these steps: Go to the TreasuryDirect website at www.treasurydirect.gov and hit the open account button and go through the registration process.

To buy government bonds using your TreasuryDirect account. Log in and then click on 

the “BuyDirect” button. Choose the type of bond you want to buy, such as a Treasury bond or a savings bond. Enter the amount (minimum $100) you want to invest and the maturity date you prefer. Choose the payment method you want to use to fund your purchase. Confirm your purchase details and complete the transaction.

Although TreasuryDirect charges no fees for buying or holding bonds, there may be fees associated with funding your account or making transactions.

Be sure to check back in to HorseGrooms to see an upcoming article on financial planning by age. As you head into your 50s and want to increase the percentage of bonds in your retirement portfolio, having a TreasuryDirect account in addition to your brokerage accounts may make sense.

Grooms can start a TreasuryDirect account with as little as $100 and grow it over time.

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This is NOT financial, legal, tax, or investment advice.

This article is for educational purposes only. It is not advice. Why isn’t it advice? First, I don’t have the licenses necessary to advise you. Second, I don’t know your specific situation, which I would need to know in order to advise you (if I had the licenses, which I do not).  

Whenever someone gives you advice, ask yourself these two questions above: do they have the credentials, and do they know your specifics? If either answer is no, treat their advice like a starting point of learning, and not as advice.

Let these blogs serve as a starting point in your education, not an end answer. Only you can find your answers to your specific situation.