Investment Accounts Ranked By Liquidity
10/01/2024
There are many different types of investment accounts. Many can hold the same type of stocks, mutual funds or exchange-traded funds, but the taxes and liquidity rules vary depending on the account. For example, you can buy Apple stock in an IRA, Roth IRA or Individual Account, but the rules on how you are taxed and when you can take the funds out are different.
Today we will focus on liquidity. Below are the types of investment accounts based on the least liquid to the most liquid. And remember, “liquidity” is simply a term for how accessible the money is.
1. Donor Advised Fund – This is an account designed to invest funds that will be contributed to a non-profit organization at a future date. These contributions are irrevocable, and though the custodian has the final say on where the funds are donated, they almost always take the recommendation of the person who contributed the funds. *Liquidity Rank: 0/10
2. UGMA/UTMA – This is an account designed to pass along money to children when they reach legal age (usually 18 or 21 - depends on the state). The contributions are irrevocable, meaning once funds are contributed, they have to be used for the child, and the child inherits the funds at legal age. *Liquidity Rank: 1/10
3. Education Savings Account – This is an account designed to invest money for a child’s education. There is a 10% penalty for funds distributed that are not used for a qualified education expense. *Liquidity Rank: 2/10
4. 529 Plan - This is also an account designed to invest money for a child’s education. There is a 10% penalty for funds distributed that are not used for a qualified education expense. If the funds are not used after 15 years, the account can be converted to a Roth IRA, and Roth IRA rules can be applied from there. *Liquidity Rank: 3/10
5. 401(k) Plan- If you are currently employed, you cannot take distributions except under certain strenuous circumstances. If you are separated from service, you can take a distribution with a 10% penalty. If you are over age 59.5, whether still employed or separated from service, the account is fully liquid. *Liquidity Rank: 6/10
6. 403(b) Plan - If you are currently employed, you cannot take distributions except under certain strenuous circumstances. If you are separated from service, you can take a distribution with a 10% penalty. If you are over age 59.5, whether still employed or separated from service, the account is fully liquid. If you leave the job that sponsors your current 403(b) at age 55 or later however, you can take penalty-free distributions. *Liquidity Rank: 6.5/10
7. IRA/SIMPLE IRA/SEP IRA – You cannot take distributions without a 10% penalty until you are age 59.5 *Liquidity Rank: 7/10
8. 457 Plan – If you are separated from service, you can take distributions at any time without penalty. *Liquidity Rank: 8/10
9. Roth IRA – You can take distributions at any time as long as it does not exceed your principal (the amount you have contributed). You cannot distribute the growth on the account without penalty until age 59.5. *Liquidity Rank: 9/10
10. Individual Account/Joint Account – You can take distributions at any time. *Liquidity Rank: 10/10
*Do not use this list to decide to open an investment account. This is my own subjective ranking system and is not correlated to any official ranking system. This list assumes that each account is not in an annuity and does not have surrender charges. This list does not include all information about each account. Just because you can take a distribution from your account does not mean it’s right for you. Please talk with me about your specific situation. I never charge for meetings or advice; I only get paid directly from accounts that I manage.