There are seven types of personal financial accounts every growing, profitable business owner should know about and consider having in place. These are all important family wealth building tools. The 7th account type is our favorite and the one very few business owners know about. At the very end, even though it’s not for everyone, we'll share a sort of bonus eighth type of account that we call the tax-slashing triple-threat!
As a whole, this is the same account planning framework we use with our business owner clients, and we've had a number of these conversations just in the last few weeks.
All of this is important because knowing about and using these account types may help you minimize taxes this year and even more so in the years. And, your financial life will be more organized and you’ll feel like you’re making quick progress to your most important goals in life.
So let’s jump right in:
The first two account types are easy: a local personal checking and local personal savings account. You probably already have these, but here’s an important point: the local personal savings account is NOT there so you earn a lot of interest. The goal of this account is to serve as a local holding tank for very near-term “big” expenses and, more importantly, a place to easily sweep and move excess cash over from your checking account so you don’t spend it too easily.
You CAN keep a portion or all of your emergency fund in this local savings account.
Or, you can keep that emergency fund in the third type of account, which is a high yield savings account. This is typically an online bank that can get you higher yields than a local savings account but transferring funds might take a business day or two. This is where you can keep your emergency fund and cash for other big expenses coming up in the next 6, 12, or 24 months...or whatever makes you comfortable.
Next, you’ll also want to have an investment account that is NOT a retirement account. This fourth category is often called a brokerage or non-qualified account, but basically, it’s just a standard investment account that can hold short or long-term investments without having a potential penalty for accessing the funds like a 401(k) or IRA. If you’re saving aggressively towards financial freedom, you may be maxing out your contributions to retirement accounts. If that’s the case, then this non-qualified brokerage account is the next place for you to save and invest.
The fifth category is “pre-tax retirement” accounts. These are your traditional 401(k)s & IRAs and SEP & SIMPLE IRAs. You probably already have at least one of these.
The sixth account category is also a type of retirement account, but it’s the less-common post-tax Roth category. You can (and probably should) have a Roth component to your 401(k) as well as even a standalone Roth IRA.
Account type #7 is the Donor Advised Fund, or DAF. This is our FAVORITE type of account to talk about. If you do at least $5,000 to $10,000 of annual charitable giving, then you should consider establishing a DAF to simplify your life. There are some tremendous tax planning opportunities with a Donor Advised Fund that your CPA or Financial Advisor can help you understand.
The bonus 8th type of account you need to know about is the Health Savings Account, or HSA. There is a catch because you can only contribute to this if you have an official “High Deductible Health Plan.” If you do, then you can contribute to this tax-slashing triple threat type of account.
1) a tax deduction for your eligible contributions no matter what level income you have,
2) tax-deferred growth because you can invest your HSA account balance in many of the investments you’re already familiar with, and
3) there are no taxes on distributions for eligible expenses.
There’s no other account like an HSA account.
One of these account types probably stood out to you. So, make a note to look into getting that account set up. Other than the local checking and savings accounts, a fiduciary financial advisor should be able to help you establish any of the account types with a best-in-class investment custodian or bank.
The content and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. The information has been obtained from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Past performance is no guarantee of future results. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance. Investment advisory services offered through Catalyst Wealth Management, LLC doing business as Ridgeline Private Wealth. Catalyst Wealth Management, LLC and Ridgeline Wealth, LLC are not affiliates.