Demystifying The Alphabet Soup Of Investment Accounts

Guest Post by Adrian Lehmann

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We have all heard of checking and savings accounts – simple enough. But you’ve probably also been hit with the alphabet soup of other accounts: Your dad saying “Max out your Roth”, your company offering a “401k match”, or your prescription saying HSA/FSA eligible. If you feel overwhelmed by any of these terms, I don’t blame you. When I came to the U.S., it was very overwhelming to me too. 

But while these accounts can sound intimidating, they are actually fairly straightforward once you spend a little time getting to know them. And this knowledge can be powerful.

So let me try to break down the slew of investment accounts. I will warn you: This may at times seem detailed, but understanding these accounts at the simplified level of The Personal Finance Playbook may be some of the best time spent for your financial future. 

Note: This is not financial or tax advice and all information is current as of August 2025.*

Let’s dive into the accounts that help you build real wealth. 

We’ll start with the most common and flexible investment account option, then we’ll learn about powerful accounts that can allow you to retire with wealth and also save on taxes. We’ll also discuss accounts that help with health and education savings. Finally, I will share my playbook on how I pick between the different accounts. 

Just remember, you don’t have to memorize all this information, you can always come back to this post as a reference.

The Taxable Brokerage Account – the most flexible account we will cover 

An individual, or joint if married, Taxable Brokerage Account lets you buy or sell investment assets like stocks, bonds, and other types of investments. When you hear people talking about their “portfolio”, this is usually what they are referring to. You can easily open one at any brokerage such as Fidelity, Vanguard, Charles Schwab, etc. 

The big perk is its flexibility. You can buy or sell at any time. You can take money out whenever you want. But with that freedom comes taxes.

Dividends and interest earned here are taxable. Dividends are optional quarterly payouts from stocks and are often taxed at a lower rate, usually 15%, but could be 0% or 20% depending on your income. Interest, like from bonds or cash, is a fixed, predictable payment taxed at your regular income rate. 

Example: Terry Taxes

To help guide us through the rest of this article, please welcome my imaginary co-worker, Terry Taxes. He’s 33, single (and looking), enjoys fish tacos a little too much, makes $65,000 a year, and is in the 22% tax bracket. Every time we talk about Terry, it will be in this font.

In his taxable brokerage account, Terry holds stocks and bonds through index funds – low-cost funds that automatically track the market so you don’t have to. This year he received $200 in dividends and $50 in interest payments from his investments.

Whether Terry reinvests that money to buy more of the same funds or uses it to buy more tacos, he owes taxes on it.

So Terry owes $30 in taxes on the dividends ($200 × 15%) and $11 on the interest ($50 × 22%). He can expect to pay some version of this every year he holds those investments. 

Additionally, if you sell an investment for more than you paid, that profit is called a capital gain, and you pay taxes on that part. If you hold the investment for over a year, you’ll pay the lower ‘long-term’ capital gains rate (the same as for dividends). Sell before the one-year mark and it’s a short-term gain, taxed as regular income.

Later this year, Terry sold a stock index fund for $10,000 that he originally bought two years ago for $7,000. His $3,000 gain will be taxed at the long-term capital gains rate of 15%, so he owes $450 in taxes ($3,000 x 15%). 

He also sold some of his bond index funds for $1,000 that he bought for $900 two months ago. Since it’s a short-term gain (he owned the fund for fewer than 12 months), he owes $22 in taxes ($100 x 22%).

Bottom line: every time you make money in this account (dividends, interest, capital gains), Uncle Sam takes a cut. The upside is you can take the money out at any time for any reason, unlike the retirement accounts we will discuss next.

Traditional vs. Roth – tax break now or later?

Before we dive into the specific retirement accounts, let’s tackle a concept you’ll see again and again: Traditional vs. Roth. These terms show up all over the place and understanding them can save you a lot of confusion, and possibly money, down the line.

They refer to how an account is tax-advantaged, which is a legal way to reduce or delay the taxes you pay.

With this foundation in place, let’s see how it plays out with actual accounts. 

Employer Retirement Accounts – saving for retirement through work

401k or 403b (Traditional)

Most people have probably heard of the 401k account, or the equivalent 403b account if you work for a non-profit. These retirement accounts are a perk your employer may offer to you. If you don’t know how signing up works at your company, HR is there to help!

They usually follow the Traditional (pre-tax) model we just discussed. You choose how much to contribute and it comes out of your paycheck before taxes. This lowers your tax bill today.

In 2025, you can contribute up to $23,500 per year or $31,000 if you’re 50 or older. 

Many employers offer a match, for example 25% of your first $10,000 contributed, adding an extra $2,500. It’s free retirement money which makes me smile just writing about it. If you’re offered a match, it’s almost always worth contributing at least enough to get it. 

Some companies require you to stay for a certain amount of time in order to keep their match. This is called a vesting period. 

Like all retirement accounts, you don’t pay taxes on dividends or growth while the money stays inside. But you will pay income tax on any withdrawals in retirement. More importantly, there are usually stiff penalties if you take the money out before age 59 1/2.  

Terry contributes $10,000 to a 401k at work. Since this is pre-tax, his contribution reduces his taxable income by $10,000 this year. He gets to pay less in taxes now, but he’ll pay taxes when he withdraws in retirement. 

Terry’s employer matches 50% of the first $5,000 with a one year vesting period. This means Terry gets an additional $2,500 from his employer, without paying a dime in taxes until he takes it out. Not bad, T. 

However, if he leaves before a year, the $2,500 and any gains he made on it goes back to the company.

One more thing: you can’t just buy anything. Most plans offer a menu of investment choices. A common choice is the Target Date Fund – a mix of index funds that automagically grows slower but steadier as you approach your retirement date. I just pick the one closest to my estimated retirement year and call it a day. 

When you leave your company, you get to keep all the money that’s in this account except for unvested matches. Your company’s plan may require you to convert it, also called “rolling it over”, into a Traditional IRA. This is a simple, tax-free process, although you may no longer be allowed to keep the target-date funds from your employer and need to buy new index funds. 

A rollover is always an option and a great way to keep things organized. Your brokerage can walk you through it. 

Roth 401k or Roth 403b

Employers may also offer a “Roth 401k” or “Roth 403b”. It has the same limits and can include an employer match.

However, unlike the traditional 401k/403b, this account follows the Roth (post-tax) model. 

Terry also contributes $10,000 to a Roth 401k. Because it is post-tax, this contribution doesn’t lower his taxable income. But when he retires, every dollar he takes out will be tax-free. Future Terry will thank present Terry for this.

So which should you choose? That really depends on your tax situation; if you ask me what I would do: I’d say in your early career a Roth 401k/403b is better and once your income grows towards peak, the Traditional version is likely better.

Regardless of which one you choose, you are so far ahead of the curve that optimizing isn’t nearly as important as just saving into these accounts consistently.

Individual Retirement Accounts – saving for retirement on your own

These are accounts you can open on your own at pretty much any brokerage, no employer required.

Traditional IRA

The Traditional IRA is the classic version of the Individual Retirement Account, using the traditional (pre-tax) model. You contribute money and might be able to deduct that contribution from your income, which lowers your tax bill today, and you will pay income tax on everything you withdraw in retirement.

In 2025 you are allowed to contribute $7,000, or $8,000 if you are over 50. 

But here’s the big catch: if you are also offered a retirement plan like a 401k at work, regardless of whether you actually use it, the pre-tax benefits of contributing to a traditional IRA may disappear once you hit a certain income limit. Odd rule, but important to know (click here to learn more).

Roth IRA

This is the post-tax sibling to the Traditional IRA and a fan favorite for a reason. You contribute money you’ve already paid taxes on and in return, all your dividends and gains come out tax-free in retirement, as long as you wait until 59 1/2. Pretty nice, right?

The contribution limits are the same as the Traditional IRA but you can only contribute if you make less than $150,000 for single tax filers and $236,000 for joint filers in 2025. If eligible, this account can provide huge tax-free growth over time.

With his $65,000 income, Terry qualifies for the Roth IRA and contributes the full $7,000. He doesn’t get a tax deduction now, but he’ll enjoy tax-free retirement money. 

You can open a Roth IRA at most brokerages with a few clicks. Then transfer in the money and boom, you are ready to invest. BUT PLEASE, don’t let your money just sit there and do nothing. Too many people fund this account and forget to invest the money. I invest in broad index funds; no gambling my retirement on the latest meme-stock.

The true power of a Roth is the long-term tax-free growth, so go make some gains! This is an account I try to max out each year. 

So Which One Should You Pick?

That depends on your tax situation but here’s my personal playbook: Unless I am absolutely sure I can tax deduct my traditional IRA contributions, I would favor the Roth IRA.

A Rollover Example

Some sad news – Terry let me know he’s leaving the company. Let’s wish him well. He’s decided to roll over both his 401k and Roth 401k from work.

His 401k is worth $26,000. He opens a Traditional IRA and rolls the money into it, so his Traditional IRA now has $26,000 ready to invest.

His Roth 401k is at $23,000. He already has $15,000 in a Roth IRA, so after the rollover his Roth IRA balance is $38,000. Terry knows his rollovers don’t affect his ability to contribute to his IRAs this year. 

Since he can no longer have the same target-date funds from his 401ks, he remembers to make sure the new funds get invested.

75% Of The Way There Recap!

Okay let’s take a breath and maybe a quick stretch. That was a lot of information. Let’s see just how much we’ve learned so far!

• A Roth 401k/403b and IRA doesn’t give you a tax break now, but you get tax-free withdrawals in retirement.

• And when you leave a job you can roll over your 401k into your IRA to keep your retirement plan tidy.

The information you have learned to this point puts you in a great spot to save and retire well, but there are a few more specialized accounts for health and family that can also help you along the way. 

And don’t forget, in the end I share my playbook for choosing between all the accounts we covered.

Health Related Accounts – saving for healthcare through work

Health Savings Account (HSA) 

You can contribute to an HSA if your health insurance plan through work has a high-enough deductible (the amount you need to pay out of pocket before your health insurance overlords even consider – maybe – paying). If in doubt, you can ask HR if your plan is eligible. 

The HSA is tax advantaged like a Traditional AND Roth account. This means your contributions lower your taxable income now AND you can take it out tax-free at any time. But you can only use it for qualified medical expenses, such as medical bills, prescriptions, over-the-counter medication, medical devices, etc. 

You can contribute $4,300 per year for a solo health plan and $8,550 for a family plan (+$1,000 if you are 50 or older). 

At his new company, Terry only has the option of a high-deductible health plan through work, so he confirms with HR that he is eligible for an HSA. 

Wanting to take advantage of the pre and post-tax benefits, he contributes the full $4,300 to his HSA. This lowers his taxable income by the same amount. 

He can invest the money, and as long as it’s used for medical expenses, every dollar comes out tax-free.

When you reach the ripe age of 65, you can withdraw from an HSA for non medical reasons and be taxed similarly to withdrawing from a 401k, making it effectively another retirement account.

Some employers give you the choice between a low-deductible plan, which makes you ineligible for an HSA, or a high-deductible HSA eligible plan. Most financial experts love the HSA because it’s one of the most tax advantaged accounts out there. While it depends on the plan specifics which is more financially optimal for you, I personally lean toward the low-deductible plan and skipping the HSA. 

How come? While HSAs sound great in theory, low-deductible plans simply lower the barrier to getting the healthcare you and your family deserve, whether routine or emergency.

Flexible Spending Account (FSA)

Many employers offer this benefit alongside their health insurance plans, particularly those plans that don’t qualify for an HSA. Like an HSA, an FSA is tax-advantaged because you contribute pre-tax money directly from your paycheck, which lowers your overall taxable income for the year. You can then use this pot of money to pay for qualified medical expenses. 

But here is the critical difference you must understand: the FSA is a “use it or lose it” account. If you don’t spend all the money you set aside by the end of the plan year, you forfeit it. It’s gone forever. Your employer gets to keep your money. 

So only contribute an amount you are certain you will spend on predictable, known medical costs for that year. Otherwise it’s money down the drain. If you’re not a type-A planner kind of person, it may be best to skip this account.

In short: FSA —> use it or lose it in a calendar year | HSA —> keep it until you need it or retire. 

Education Related Accounts – investing for your kid’s future

The 529 Plan 

The 529 plan is a dedicated investment account designed to help you save for future education costs for your kids. It’s tax advantaged like a Roth IRA. You contribute post-tax money, but that money grows tax-free, and you withdraw it tax-free for qualified education expenses. 

You can use it for university costs, K-12 private school tuition (up to a limit), trade school, and even to pay down some student loans. You can easily open up a 529 account at your brokerage of choice.

A common fear is, “What if my kid doesn’t use it all for school?” Would you lose it or pay a ton in taxes? The good news is you can roll over leftover 529 funds directly into a Roth IRA for your child, up to $35,000. So if (American) college is in your kids future, this is a great plan to save into. Even if you send them abroad to a free university, giving them a tax-free $35,000 Roth IRA is a wonderful tool for parents to help their kids start adult life a little easier.

You can contribute up to $18,000 per year without any tax implications. If you exceed that amount you have to file it as a gift on your tax return. However, the lifetime parent-child gift tax exemption is $14 million, yes million. I think it’s safe to say that this is not a concern for most people and if it is a concern, congrats! Hopefully this blog helped and you probably need a financial planner now. 

The 529 plan is a deeply personal and emotional decision. It can be challenging to reflect on the value of kids’ education and how to build that in a financial plan. I consider my retirement and want to avoid sacrificing my own financial future for my kid as that can have many negative consequences for me, my relationship with them, and them down the road. Also there are wonderful cheap – think <$5k/year – or free colleges in many countries around the world where they can get a great education.

The contribution decision here may be the least finance-driven of all the accounts we discussed. It is emotional, spiritual, and messy but that’s what makes life interesting!

Playbook – putting it all together

Now which of these accounts should I put money into? Maxing all of them out would leave me no income left to live on!

While I legally cannot give you financial advice, I believe sharing the logic behind my own strategy can be a helpful educational tool. This is my personal playbook, which is tailored to my own goals and risk tolerance. My goal is to show you one possible way to prioritize these accounts, which you can then use as a starting point for your own research:

1. First, after consistently spending less than I earn (see this blog post), I pay down all my non-mortgage debts in order of highest to lowest interest before thinking about the next steps. 
2. I then build my emergency fund in a high-interest savings account consisting of 3 to 6 months worth of expenses. 
3. If I have a high deductible health insurance plan and cannot choose a low deductible plan, that emergency fund will have to be larger and part of it can (and probably should) be in an HSA. I want to be prepared for healthcare expenses that may pop up.
4. Once that is covered, I try to at least get the maximum match out of my 401k/403b, if I get one. As I said before, it doesn’t matter that much if it’s a Roth or traditional, I just do it!
5. Next is my Roth IRA; I try to max it out.
6. If I have more money left to save, I max out to the 401k/403b.
7. If I still have money left to save, I would put it into a taxable brokerage account.

Whatever I put my money into, I DON’T FORGET TO INVEST IT!

FIRE – Financial Independence, Retire Early

If this is yet another new acronym, feel free to skip this paragraph – let this be a rabbit hole for another day. 

Before I let you go, I want to address the FIRE crowd in the room. If you plan on retiring early, you may want to put more money into taxable brokerage accounts as you can withdraw from them at any time.

Roth/Traditional IRAs/401k’s/403b’s all lock you into withdrawing later in life unless you like to pay stiff penalties. So the taxable account may become your best friend after all.**

Conclusion

You did it! Seriously, well done – I know this was a dense one. 

You now know more about investment accounts than the vast majority of the population. Thanks for sticking with me and I’m sorry they didn’t teach you this in school. You don’t need to master it all today, just come back to this article as a reference when you’re ready to make financial moves.

I hope this post helps you work toward your financial goals, navigate job perks with confidence, and maybe sound a little smarter at next Thanksgiving dinner.

Thank you, Dustin, for letting me write a guest article for your blog, this was a lot of fun.

Wishing you confidence, clarity, and compounding returns in all accounts.

– Adrian

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_{* Dustin and I reviewed this article thoroughly for accuracy and completeness, however we cannot take any responsibility for omissions or inaccuracies.} 

_{**If you are in this crowd: Figure out your planned retirement age, your FIRE number, and how much money you need in the taxable account to ride it out until 59 1/2 when you can then withdraw from your alphabet soup of retirement accounts.}

_{Disclaimer: The information provided in this article is for educational and informational purposes only. It is not intended to be, and should not be construed as, financial, investment, or tax advice. All examples, including the “Terry Taxes” scenarios and the author’s personal “Playbook,” are for illustrative purposes. You should consult with a qualified professional, such as a Certified Financial Planner (CFP®) or a Certified Public Accountant (CPA), before making any financial decisions.}