Which Types of Investments Should You Own and Where Should You Own Them

Summary

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Motley Fool Money: "Which Types of Investments Should You Own and Where Should You Own Them"

Date: April 4, 2026
Host: Robert Brokamp
Guest: Stephanie Marini, CFP®

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Episode Overview

This episode of Motley Fool Money’s personal finance edition is a “Back to Basics” investing class. Host Robert Brokamp and certified financial planner Stephanie Marini walk listeners through the foundational types of investments—stocks, bonds, and cash—as well as the pros and cons of different account types (taxable brokerage accounts, IRAs, and 401(k)s). Their conversation centers on helping listeners align their investments with their goals, optimize tax efficiency, and understand the real-world trade-offs of each approach.

The episode is part of the "2026 Financial Planning Challenge: A Year Well Planned," aiming to help investors systematically organize their financial lives, with a focus this month on the choices around what to invest in and where to hold those investments.

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Key Discussion Points & Insights

1. Types of Stock Investments: Index Funds, Actively Managed Funds, and Individual Stocks

(Starting at 01:15)

A. Index Funds

• Pros:

  • Simplicity & Low Cost:
    “Simplicity...is their greatest benefit. It is the easiest way for money to be invested in the market without, you know, too much research, too much time spent and still, still at a low cost.”
    —Stephanie Marini (01:43)
  • Broad Diversification: One purchase can give you access to an entire market or sector.
  • Low Fees: Major providers have fees as low as 0.03%–0.04%.

• Cons:

  • "Boring" Returns:
    “If simplicity is going to be the pro, it’s kind of boring on the other side. You don’t get the flexibility or the niche of researching and picking what you’re interested in.”
    —Stephanie Marini (02:53)
  • Market Matching, Not Beating: Index funds match, but don’t beat, the market.
  • Overlap & Diversification Issues: Need to watch for concentration in top holdings across funds.

B. Actively Managed Funds

• Pros:

  • Potential to Outperform:
    “You do have more of a potential to beat the market. That’s what these managers are trying to do...”
    —Stephanie Marini (04:54)
  • Downside Management: Managers can tactically adjust holdings to potentially reduce losses.
  • Niche Strategies: Can align with specialized investment goals or sectors.

• Cons:

  • Higher Fees: Actively managed funds often cost substantially more than index funds.
  • Manager Risk & Style Drift:
    “A manager could leave...a manager can be wrong...you can have a style drift over the years.”
    —Stephanie Marini (06:16)
  • Tax Inefficiency: More frequent trades can trigger more taxable events in non-retirement accounts.
  • Monitoring Required: Need to check performance at least annually.

C. Individual Stocks

• Pros:

  • Full Control & High Conviction:
    “The fact that you can research, you have the conviction to pick your own and build your own portfolio...is really not something you can get anywhere else.”
    —Stephanie Marini (07:42)
  • Potential for Life-Changing Returns: Opportunity to find the next Amazon, Apple, or Nvidia.
  • Tax Flexibility: Investors control when to realize gains and losses.

• Cons:

  • Hard to Pick Winners:
    “If we all knew what the next Nvidias would be, wouldn't be the next Nvidia.”
    —Stephanie Marini (09:11)
  • Diversification Is Complicated: Need to hold many stocks across sectors for safety (at least 25, possibly 50 stocks recommended).
  • “Return on Hassle”:
    “It takes a lot of time to find the stocks and then hold them and decide when to sell them.”
    —Robert Brokamp (09:59)

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2. Non-Stock Investments: Cash and Bonds

(Starting at 12:01)

A. Cash

• Use Case: Emergency fund or near-term needs.
• Recommendations:
  • 3–6 months of expenses in cash for working families; 3–5 years for retirees.
  • Use high-yield savings or money markets paying at least 3%.

B. Bonds

• Risk/Return Tradeoff: Historically, bonds outperform cash by 1–2% per year, but not always (e.g., recent low returns).
• Tax Efficiency:
  • Treasuries are state-tax free; municipal bonds can be federally and state tax-free.
• Choosing Between Individual Bonds and Bond Funds:
  • Individual Bonds: Greater predictability; more work; less diversification.
  • Bond Funds: Instant diversification and reinvestment convenience.
  • Target Date Bond Funds: Hybrid approach for specific maturity needs—providers include Invesco, Blackrock, and Vanguard.
• Memorable Note:
  “Get the High Yield Savings Account. Don’t stick with the default at your bank...You shouldn’t have to settle for anything less than 3%...”
  —Robert Brokamp (13:22)

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3. Where to Hold Your Investments: Account Types

(Starting at 15:53)

A. Taxable Brokerage Accounts

• Pros:
  • No contribution limits or withdrawal penalties.
  • Total flexibility in investment choice.
  • Control over realization of capital gains/losses.
• Cons:
  • All income/dividends are taxable annually.
• Best For:
  • “Set it and forget it” index funds or individual stocks you plan to hold for a long time.
• Tip:
  “You want to choose your most tax efficient investments for your taxable brokerage account.”
  —Robert Brokamp (19:23)

B. Employer-Sponsored Retirement Accounts (401(k), 403(b), TSP, etc.)

• 2026 Contribution Limits:
  • Under 50: $24,500
  • Age 50–59 or over 64: $32,500
  • Ages 60–63: $35,750 (“Super Catch Up”)
• Pros:
  • Payroll deduction encourages saving.
  • Possible employer match (“free money”).
  • Tax advantages (“pre-” or “post-tax” depending on traditional vs. Roth).
  • Legal protections in case of bankruptcy or lawsuits.
• Cons:
  • Limited investment selection (often 10–30 funds).
  • Early withdrawal penalties (typically 59½ age limit).
  • Some plans have higher fees/costs.

C. IRAs (Traditional & Roth)

• 2025 Contribution Limits: $7,000 (under 50), $8,000 (50+)
• 2026 Contribution Limits: $7,500 (under 50), $8,600 (50+)
• Pros:
  • Wide investment choice (“world is your oyster”).
  • Lower account fees vs most 401(k)s.
  • Roth IRAs allow tax-free withdrawals and no RMDs.
• Cons:
  • Lower annual contribution limits.
  • Roth IRA contributions subject to income limits.
• Tax Planning:
  • Roth is beneficial if you expect higher tax rates in retirement or want to minimize future RMDs.
  • “Roth...withdrawals are not taxed...so the question decides when do you want to pay the tax: now while you’re still working or later when you’re in retirement.”
    —Stephanie Marini (26:29)
• Strategic Asset Location: Put high expected growth assets in Roth IRAs.

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4. Order of Account Funding

(29:02)

• Recommended Sequence:
  1. First, contribute to your employer plan to earn the full match (“free money”).
  2. Next, fund a Roth or Traditional IRA (based on eligibility and strategy).
  3. Then, use taxable brokerage accounts for additional saving/investing.
• Diversification of Account Types:
  “I think the best option is to have a little bit in every bucket so you can play with those levers in retirement.”
  —Stephanie Marini (27:33)

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5. Final Practical Advice

(31:00)

Robert Brokamp’s “Portfolio Audit” Questions:

1. If you didn’t own this investment, would you buy it today?
   • Don’t just rely on past performance; consider its future prospects.
   • “If your portfolio were 100% cash...would you buy that investment?”
2. Is it in the right account?
   • “Are your tax inefficient investments in your tax advantaged accounts?”
   • “Are you using your taxable brokerage accounts for low or no yielding stocks that you plan to hold on to for a really long time? Are you putting the investments with the greatest growth potential in your Roths?”
   • Rearranging (asset location) can potentially save on taxes, but always check for tax consequences of moving or selling first.

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Notable Quotes & Memorable Moments

• “There’s a concept from CPA Mitchell Baldridge, who used the term return on hassle. Right? We know return on risk, we know return on equity, but there’s return on hassle to investing in individual stocks.”
  —Robert Brokamp (09:59)
• “Getting invested is probably the start of every conversation...having access to that compounding is the greatest aspect to consider.”
  —Stephanie Marini (29:02)
• “This is not an either or decision. You can do a little bit of both. And that’s what I do. I have a lot of index funds. I have some actively managed funds...and I own I don’t know how many stocks, but many individual stocks as well.”
  —Robert Brokamp (30:01)

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Timestamps for Major Segments

• 01:15 — Introduction to stock investing: index funds, actively managed funds, individual stocks
• 04:54 — Actively managed funds: advantages and drawbacks
• 07:42 — Individual stocks: control vs. risk
• 12:01 — Non-stock assets: cash vs. bonds
• 14:49 — Individual bonds vs. bond funds vs. target date bond funds
• 17:56 — Investment account types: taxable, 401(k), IRA
• 25:18 — IRA advantages and trade-offs
• 29:02 — Priority of funding accounts and final advice
• 31:00 — Portfolio audit: Brokamp's two key questions

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Closing Thoughts

This episode delivers a foundational yet nuanced guide for investors at any stage, emphasizing:

• The importance of knowing both what to invest in and where to hold those investments;
• The real-world trade-offs between simplicity, cost, risk, and tax efficiency;
• The long-term benefit of getting started early, diversifying, and periodically reviewing your account choices and holdings.

Listeners come away prepared to “get it done” with clear action items and a more comprehensive understanding of how to structure their investments for lasting financial wellbeing.

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Transcript

[Stephanie Marini]

Foreign.

[Robert Brokamp]

This week on the personal finance edition of Motley Fool Money, how to choose the types of investments you own and where to own them. I'm Robert Brokamp and it's the first Saturday of the month, which means it's time for the next segment of our 2026 financial planning challenge. This is a Back to Basics episode as my guest Stephanie Marini and I discuss the pros and cons of various types of investments and the accounts in which you can hold them. Because we covered so much ground in this conversation, we're going to skip the news of the week and get right into our discussion. It's month four of our Financial Planning Challenge, which we're calling a year well planned. And if you've been following along at home, you've come up with a system to monitor your spending, your net worth, as well as evaluate your portfolio and how much you should have in and out of the stock market. This month we're going to cover the different ways to invest in stocks, bonds, a little bit of cash and the account types to consider. Here to join me for this very wide ranging discussion is fellow certified financial planner Stephanie Marini. Welcome back, Stephanie.

[Stephanie Marini]

Thanks so much for having me.

[Robert Brokamp]

All right, so let's start with the stock side of the portfolio. We are the Motley Fool. We love our stocks. And let's go through the pros and cons of the various choices. And the main ones are index funds, actively managed funds, and individual stocks. So first up, index funds. Right. And these are just funds that track an existing index such as the S&P 500, NASDAQ 100. But you can find an index fund that tracks just about any asset class, including international stocks, individual sectors, industries, even bonds. So, Stephanie, why should someone consider index funds?

[Stephanie Marini]

I think the simplicity of index funds is the their greatest benefit. It is the easiest way for money to be invested in the market without, you know, too much research, too much time spent and still, still at a low cost. So because you get that broad diversification, it could be a one time purchase that gives you access to the full index that you've chosen. And the fees are extremely low. And we're talking about.0304%, especially with some of these big name Vanguard, Schwab Fidelity funds. So I really, I think that's their biggest asset.

[Robert Brokamp]

Yeah, and it really is a set it and forget it investment. I mean, when I started investing back in the 90s, one of the first things I bought was an S&P 500 index fund. And I haven't really looked at it since then, you could just hold onto it pretty much forever. And the evidence is clear that it's tough to beat a relevant index fund. So why not have a foundation of that? We at the Motley fool, we love our individual stocks, but if you know our history, we have been fans of index funds from the very early days. So totally fine to have at least a foundation of index funds now. Why, Stephanie, would you consider not doing index funds? What are some of the downsides?

[Stephanie Marini]

I think the easiest downside to the, you know, if simplicity is going to be the pro, it's kind of boring on the other side. You don't get the flexibility or the niche of researching and picking what you're interested in. It is that set it and forget it so you don't have to look at it anymore. And you know, in terms of returns, it's not going to beat the market. I mean, you might hear, you know, small little percentage points here and there, but the point is that it matches an index fund will match its respective market. So you're never going to get those, you know, headline returns that's going to make you the millions of picking the right company. So, you know, I think the boring part of it is its biggest downside.

[Robert Brokamp]

Yeah. And you do have to be careful, right. Because there are many index funds out there that track maybe more smaller industries or sectors or even country index funds that are actually not all that diversified. They're pretty much dominated by two or three stocks. So you do need to look at the index fund to determine whether it makes sense for you. And you still have to choose which index funds and you have to choose the right mix of index funds so it's not completely set it and forget it. Despite what we're saying, you still have to make some decisions about which ones to buy and how much to have in each.

[Stephanie Marini]

I think that actually brings up a good point. You know, if you're buying one index fund and continue adding to that one, you have the diversification within that index fund as you start building your portfolio. And you might be adding different index funds to build out your portfolio. You have to be careful with that stock overlap to make sure you're not overly concentrated in those top holdings because a lot of them can overlap. So it is not quite set it and forget it like you said, especially as your portfolio grows and you keep adding to it. But in terms of getting started, I do think it's the easiest way.

[Robert Brokamp]

If you love the idea of funds in which you make one purchase but then get diversified exposure to all kinds of investments. The competition to index funds are actively managed funds. And these are investments in which there's a team of managers and analysts who actually pick the securities in the fund rather than just mimicking an index. So what are the advantages here?

[Stephanie Marini]

I think for actively managed funds you do have more of a potential to beat the market. That's what these managers are trying to do is make the tweaks and adding more or less of the different mixes to try and beat the market. And then again on the downside, because you have active managers, they are making the changes to try and lessen any downside exposure as well if the market turns. I think another benefit of actively managed funds is you can get more niche on your strategy. You know, with active managers you can get very, very specific into someone's investment opinions, what they think is going to be the next sector. And so it allows much more niche investing styles.

[Robert Brokamp]

Yeah, I'll build on that. You know, there are funds out there, teams out there, managers out there who do have these unique skills or at least unique interests. And by adding that fund to your portfolio, you get a certain level of diversification that you may not get through an index fund or picking your own investments. You just have to stay on top of them because the evidence is clear that it is difficult to beat a comparable index fund. So definitely takes more time. If you're going to be investing in actively managed funds, you should be checking on those returns at least once a year because you're going to be paying higher costs. So you want to make sure that money is worth it. Speaking of the higher costs, what are some of the other downsides of actively managed funds?

[Stephanie Marini]

I think if you're going to have a manager, a human involved in picking that you have the risk associated with that. A manager could leave and then what does that do to an investment strategy? A manager can be wrong. And so you have a bit more that human aspect. And then along with that, because you are getting more niche or using that rationale, you can have a style drift over the years. It's not that set it and forget it that maybe some of the index funds are because opinions change, companies change and that could move the needle on how you're invested.

[Robert Brokamp]

Yeah, I think you have to set your expectations with actively managed funds that they are going to go through periods of underperformance. And if you're not comfortable with that, it's probably not the right move to stick with the index fund. And also actively managed funds tend to be more tax inefficient than index funds? Not always, but. So if you're going to go this route, it's probably best to keep them in an IRA or 401k. And if you go to a site like Morningstar, you can see the after tax returns on various funds. So you can compare those to an index fund to see like, okay, this money's going to my taxable brokerage account, but it's very tax inefficient, maybe on an after tax basis. This is not the fund for me. All right, so let's say you don't want to pay anybody to pick your investments. You don't want to pay an index fund provider, you don't want to pay an active manager. You want to pick your own individual stocks, which of course is what we do a lot here at the Motley Fool. Stephanie, what are the advantages?

[Stephanie Marini]

I think the full control is the advantage for our heavy researchers out there. The fact that you can research, you have the conviction to pick your own and build your own portfolio, I think is really not, not something you can get anywhere else. Everything else is going to come up with that prefixed basket for you. Individual stocks allowed you to build the basket and so there's a huge amount of beating the market and the returns that you can get if you choose right. And then I think the tax flexibility is an underrated benefit that individual stocks hold because you're not subject to a fund manager selling off a portion of the portfolio to invest in something else and leaving the investor with the tax liability. So, so being able to control when to sell, how long you've held it shorter long term capital gains is a really big pro for individual stocks.

[Robert Brokamp]

Yeah, I'll piggyback on that. It's not only just the control in terms of buying and selling and the tax consequences, but it's your exposure to various sectors and industries and individual stocks. It's all within your control. The tax aspect too is you could also do more targeted tax loss harvesting if you're owning individual stocks than what you can get with index funds or actively managed funds. And of course, the big, big side is just everyone wants to get the next Amazon or Apple or Nvidia, which is not easy to do. But if you can get one or two or three of those, it can really be life changing wealth. That said, it's not easy. So what are some of the downsides to investing in individual stocks?

[Stephanie Marini]

I mean, I think you mentioned the first one. It's that easy to pick if we all knew what the next Nvidias would be, wouldn't be the next Nvidia. And so I think having eggs in one basket, I think that as humans, as individual investors, it's easy to be excited in one sector in one area. And so it's hard to force yourself into creating a basket fully diversified, not limited in one sector in one area. And again, it's hard to pick winners consistently. I think the stats out there are not good if you wanted to google them as far as how many people you know win and lose, especially if you look up the day trader rates. So I think that is the hardest thing to have to get over of Even if you are investing in individual stocks, you have to be well diversified in the number but also the sector, the industry that you are investing in.

[Robert Brokamp]

Yeah, here at the bottom. I've mentioned this in previous episodes. We often say you should own at least 25 stocks, but our CEO and co founder Tom Gardner has moved that up to 50. And then there are other just rules of thumb. You know, you don't want to have more than 10% in one stock or maybe 20 to 30% in one sector. So that takes a lot of work to get that much diversification. There's a concept from CPA Mitchell Baldridge, who used the term return on hassle. Right? We know return on risk, we know return on equity, but there's return on hassle to investing in individual stocks. It takes a lot of time to find the stocks and then hold them and decide when to sell them. So if you're going to go investing in individual stocks, and I assume most people listening to this podcast are doing it, I know I'm doing it. You should certainly track your returns to make sure that extra time and effort is paying off. Because if not, you might have been just been better off in an index fund.

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[Robert Brokamp]

all right, let's move on to the non stock side. So this is money you want to keep safer. The main choices are cash and bonds. So how do you think people should go about making the choice between one or the other or maybe a little bit of both?

[Stephanie Marini]

I think that's super personal. I think a huge portion of this is a risk tolerance. What is your capacity for risk and also when you're going to need the money. So you know, I am still working. My husband and I are both employed. We talk about three to six months of emergency fund in cash and something like a high yield savings account where we can access right away. But as we get older, as we near retirement, we are going to have closer to three years, five years of cash liquid to fund our retirement. So I think age is a big factor. I think risk tolerance as far as what household income looks like, how secure jobs are, are you commission based? I think that's a big part of how much should be kept liquid. And so that is on that cash side of the equation. And bonds are in some ways a hedge against those stock or stock portfolio, whether that be individual actively managed funds or index funds. But bonds do have some access to the market higher returns typically than a high yield savings account. But on the more conservative side still, because they are paying that dividend and interest throughout the course of the bond.

[Robert Brokamp]

When you look over history, bonds have outperformed cash by like 1 to 2 percentage points a year annualized, which may not sound like much, but you compound that over decades and it's meaningful now. If you've been investing in bonds over the last five years, you haven't seen that the Vanguard total bond market ETF has returned at annualized 0.3% over the past five years. So you would have been better off in cash. So there is a little bit more risk or uncertainty with bonds. So you just have to decide on whether that is worth it. I think any money you need in the next one to Three years probably is best off in cash. The other thing to consider with bonds too though is that some bonds do have tax advantages, right? Treasuries are federally taxable but free of state income taxes. And there's your municipal bonds, which can be completely tax free if you do it right, as opposed to cash, which will be taxable at the federal and state level. So if you're in a higher tax bracket, maybe in a high tax state, that also could tilt you more towards the bonds, assuming this is in your taxable brokerage account, not your IRA or 401k. And then the other point I'll mention here that you highlighted is get the High Yield Savings Account. Don't stick with the default at your bank or even in your brokerage account. These days you should be able to get over 3% through the high Yield Savings Account, maybe through a money market. You shouldn't have to settle for anything less than 3% these days. If you decide that you want to invest in bonds, you do have a choice. You could invest in individual bonds or bond funds. So how should someone choose which is best for them?

[Stephanie Marini]

Well, I think in terms of what's best for them, I think looking at the yield that bonds are getting. So you mentioned the Vanguard bond fund has been returning very little. I know at one point a couple of years ago, the I bonds, I think they had that record break 8%. That's something we hadn't seen in a while. That was on the individual side. So you had to go through Treasury Direct in order to buy that particular I bond. And that rate was only good for six months. So again, it has more of that work asset aspect to it because you will have to research the bond. You will have to see if it's a municipal bond, does it fall under that exemption, you know, what state is it in, what city is it in. So individual bonds are going to have that more work. But because you are buying an individual bond, you know what the yield is and therefore what you're going to get on a biannual or annual basis. So that has a bit more control versus a bond fund is more in line with that index fund where it is a set and forget it, they will do the work for you. You're buying a premixed basket. But on one hand the returns, you know, they're shooting for something. Are they going to get it? Are things sold? It's a bit out of the control, yeah.

[Robert Brokamp]

With the individual bonds you just have more predictability. Right. If you invest $1,000 at a five year bond at yielding 4%, you know how much interest you're going to get every year. And you know in five years you get your $1,000 back, assuming the issuer is still in business. But it does take more work and it may not be as diversified. You mentioned I bonds. Those come from Uncle Sam. Those are considered pretty safe. But if you move into corporate bonds, then you do have to worry about risk. So with the bond fund, you get the instant diversification. And it's easier to reinvest the interest. Right. If you have a thousand dollars bond paying 4%, you're going to get $40 a year. But you can't really reinvest that in the bond that issued it. Whereas with a bond fund it's very easy to reinvest your interest, accumulate more shares. The final point on this, I'll just highlight that over the last several years there's been this sort of hybrid known as target date bond funds. So these are bond funds that only buy bonds that mature all in the same year. Like maybe 2030, for example, a 2030 target date bond fund would just own bonds that mature in 2030. When those bonds mature, they're all cash. And then you get the cash as the investor and the fund ceases to exist. But it provides a little bit of the best of both worlds. You get the instant diversification, you get the easy reinvestment, but you have a little bit more certainty about what it will be worth in the future. And if those are of interest to you, the two biggest providers are Invesco and their bullet shares and BlackRock and their I bonds, which is confusing because these are not the same I bonds from Uncle Sam. And Vanguard recently got into this space too. So that's a place to look if you're interested in bond funds, but with a little bit more certainty. All right, let's move on to a whole other topic here. You know, if you've been following along, you've thought about the investments that you'll own in what form. Now you have to choose from among the account choices. We're just going to highlight the three big ones. Those are a taxable brokerage account, IRAs and employer sponsored accounts like 401 s. So let's go through each of those types of accounts and maybe just provide some thoughts on which types of investments should go in those accounts. Let's start with taxable brokerage accounts. Stephanie, what are the advantages and what types of investment should go in them?

[Stephanie Marini]

I think the biggest advantage for a taxable brokerage account is unlike the other two, there are really no rules attached to a brokerage account. It's your money. You could put as much in there as you want every year. There's no limits, there's no contribution limits. Income qualifications you have to hit. So that's the biggest plus. Then you can invest in anything that you want. So any type of investment can go in a brokerage account, whether that be a reit, cash bond, funds, active manage, individual socks, everything can go in there. So I think that's a huge advantage. And then similarly to the no rules attached, there's also no rules attached when you pull the money out. There's no penalties to be mindful of. There are taxes due, you know, there's capital gains going to be involved or capital losses. But again, you have the control of when you're pulling those levers. You don't have to worry about it hitting any age requirement before you avoid a penalty for taking the money out. So I think that is the biggest advantages for a taxable brokerage account. And as far as what type of funds can go in this, I personally like to have the set it and forget it index funds, not as much turnover, not getting as many dividends, because again, that's something that will have a tax consequence every year that I personally don't want to have to manage. So I like having the control of when I'm buying and selling. And those set it and forget it type of investment are typically best in something like this.

[Robert Brokamp]

Yeah, you've hit on all the highlights. I don't have much to add there. Right. With regular retirement accounts you generally have to leave the money until age 59 and a half. There are ways around it, but you should basically be thinking about leaving that money in there till your 60s. And with brokerage accounts you just don't have to worry about that. And I'll just second what you said. You want to choose your most tax efficient investments for your taxable brokerage account. So that could be a stock that doesn't have a yield, it could be index funds, it could be your municipal bonds or any sort of bonds that have tax advantages. And I should also point out there's some tax free money markets as well. So those are things to consider. Now let's move on to employer sponsored accounts like a 401, 403, maybe the federal savings plan. And just so everyone knows, for 20, 26, I'm just going to read the limits here, it's $24,500. If you'll be below the age of 50 by the end of the year it's $32,500 if you'll be be between the ages of 50 and 59 or over the age of 64 by the end of the year. And then there's the super catch ups that have just been around now for a couple of years. That is if you'll be between 60 and 63 by the end of the year and that is 35,750. All right, with all that said, what's good about a 401k or similar type of account?

[Stephanie Marini]

Stephanie, I think for me mentality hits on on 401k. I think the aspect of having the money taken out and that savings before it hits your checking account or before you get your paycheck is huge. So it's that pay yourself first mentality that you can get with these accounts. Again, having money taken out can be pre or post tax. If an employer offers a Roth 401K, but it's taken out before you get your check and it hits your account. So I think that is a huge benefit to help a mindset shift of starting to save. And usually along with these employer plans there is some kind of eligible match. So if a company will offer, if you put in 4%, we will match 50% up until a certain amount. That's essentially free money which I'm about maximizing. So if we can encourage that savings rate and again, living below your means, I think that is going to be someone's greatest asset and the greatest way to grow wealth slowly but surely over the long term.

[Robert Brokamp]

Yep, I totally agree. And of course these have tax advantages. Depends on whether the traditional Roth and we're going to touch a little bit on that toward the end. But you do get the tax advantages. You actually also get some legal protections in one of these types of accounts. There's some bankruptcy protection, some lawsuit protection that you get with these accounts. So that might be something to consider if you, especially if you work in some sort of profession where there's significant legal liability. So those are all very good. What are some of the limits to investing in these types of accounts?

[Stephanie Marini]

I think one limit we talked about a little bit earlier are the ramifications of when you're allowed to access the money. There are a lot of stipulations about being, you know, 59 and a half is that big target year. There's a little bit of 55 you might be able to access and again, some exceptions, but for the most part you have to be at least 59 and a half to access penalty free from a employer qualified plan. And I also think a limitation for most employer based plans are the employer is going to limit the investment options that you have. So usually it's a good mix. I mean they have every employer that I've seen or worked with has had a decent offering. But you are still limited. They're going to give, you know, maybe 10 to 30 options. Some are now starting to offer a brokerage option, but they're few, much fewer and far between. So being limited on that could be a downside.

[Robert Brokamp]

Yeah, the limited investment choices and their extra costs. Right. It actually costs an employer to offer a 401 or a similar plan. Sometimes the employer will shoulder all those costs, but most times they don't. So you're sharing in those costs. And you mentioned the illiquidity. Right. In some cases you can't get the money out of the employer plan at all. If you're still working there, you might be able to take a loan against it. But that has its own risks because if you don't pay the money back in a timely manner, that's considered a distribution and you'll be possibly taxed, penalized. So you definitely have to be very comfortable with leaving that money in the account. When it comes to deciding which type of investment should go into like a 401 or 403, what should you think about?

[Stephanie Marini]

Well, first the options. Right. So because it's an employer qualified plan, the employer is going to give the options available to you. So an individual could be very limited in what goes in there. But one positive of that is because the qualified plan taxes are delayed until withdrawals, you can a make changes and not be worried about capital gains as you're making changes. But then you also can have things like dividends that are not paid, the taxes are not paid annually. So I think that's something to consider when you're looking at an employer sponsored plan.

[Robert Brokamp]

Yeah, that's a good way to think about it. Like you do most of your rebalancing within your employer plan, but then you use your taxable brokerage account for the investments that you're going to hold for many, many years, if not decades. And as you point out, you know, you only have certain number of choices in the employer plan, but often they will at least include a foundation of index funds. So if you are someone who wants to invest in index funds, your employer plan might be the place to do it. In fact, they might have lower cost index funds that are available to you outside the plan. Use the 401k or 433b for the index fund investing that you do and then use your brokerage account or your other accounts for the other types of investing. Now there are other retirement accounts available out there that have some other choices and maybe lower costs and those are IRAs, of course. And I'm going to read the limits for 2025 and 2026 because it's not too late to contribute to an IRA. For 2025 you have until April 15th. So the limits for 2025 are 7,000 do or $8,000 if you'll be 50 and older. And for 2026 it's $7,500 or $8,600 if you will be 50 or older by the end of the year. Alright, so tell us a little bit about what you think are the advantages of IRAs.

[Stephanie Marini]

Well, I think like a brokerage account, the no restriction on investment options is a huge benefit for an ira. I think that having it within your control, being able to pick the investment choices again that you have, it helps build a portfolio that you are in, an individual is in control of. So I think that is good. There are some, again, some ways to access money, especially if you're considering a Roth, contributions are able to be accessed a bit earlier. So I think that is a pro for IRAs. I do think that in terms of being different from an employer sponsor plan, the lower limitation, lower contribution limits does make it a little bit difficult though.

[Robert Brokamp]

The contribution limits are definitely lower. The expenses are generally lower though, so that's good too. Another thing that I think it's important to consider is that if you like the Roth account, you may or may not be able to contribute to a Roth IRA. Depends on your income. Whereas with the Roth 401 or Roth 403, whatever you have at your office, you can always contribute regardless of your income level. And since I brought up the Roth. Stephanie, just give us some quick thoughts on how you think people should decide between the traditional and the Roth account.

[Stephanie Marini]

So I think a big question is whether or not you believe you are going to be in a higher tax bracket right now or in the future. And that could be two part where you think tax brackets will go in the future and how they will be adjusted, but also what your earnings are and how you think that will be affected. And so you mentioned contribution limits. It's something that to be mindful of an individual might not be eligible to invest in a Roth if they are above those contribution limits. So that's the first thing to take into account. And then I would say the second thing is because of Roth, the withdrawals are not taxed because funds have already been taxed. The money that you put in is already taxed. When you take those withdrawals, they are not taxed. The question decides when do you want to pay the tax? Now while you're still working or later when you're in retirement. So, you know, I've, I've had clients go both ways trying to predict different things. I will say I think the best option is to have a little bit in every bucket so you can play with those levers in retirement.

[Robert Brokamp]

The other benefit of the Roth is you do not have required minimum distributions at age 73 or age 75 if you were born in 1960 or later, which usually is not a big deal for most people. But if you enter retirement with, you know, well over a million, maybe multiple millions of dollars, once you get to your 80s or so, and that's mostly in traditional accounts, your RMDs are actually going to be pretty significant. And there are calculators out there on the web that can help you estimate your future RMDs. And if they look like they're going to be way more than you need, then you might want to favor Roth accounts. All right. When it comes to investing in ira, Stephanie, what do you think about.

[Stephanie Marini]

Well, I think the question then becomes is it a traditional or Roth IRA specifically for the Roth IRAs, again, because the funds are post tax and they won't ever be subject to RMDs or taxes upon the withdrawal. I would say your highest growth potential asset should go in Roth. So things you plan on keeping forever those high. If you're going to invest in individual stocks, any type of high growth that could be a perfect option for a Roth IRA in terms of individual IRAs, because again, you're more it will be subject to RMDs. I, I think that you do have access to the full market, so sticking with your overall asset allocation, but the world is your oyster for that.

[Robert Brokamp]

All right, final question here. Stephanie, we've covered a lot of ground. Do you have any final thoughts on choosing how to invest and in which types of accounts?

[Stephanie Marini]

I think getting invested is probably the, the start of every conversation. It's, it can be very easy to say I don't have enough money or I don't know where it's going to come from. But getting invested, having access to that compounding is the greatest aspect to consider in terms of order funding. We've talked about a lot of different things A lot of different accounts. I would say my preference of order funding is invest in an employer qualified plan to get a match to get that free money. Consider the differences then between a Roth and traditional ira. Again, if you're eligible for a Roth and then the brokerage account for anything left over. And again, consider that as you enter into retirement, you as an individual have much more control over the withdrawals and funding. You're no longer getting that paycheck, so you get to control those levers of where you're pulling money from and really control that tax bill at the end of the year. So having access to all of these different buckets will give you the most options in retirement.

[Robert Brokamp]

I think also it's very important just to understand this is not an either or decision. You can do a little bit of both. And that's what I do. I have a lot of index funds. I have some actively managed funds that I stay on top of and I own I don't know how many stocks, but many individual stocks as well. And I think if you are starting out, you might start with a foundation of index funds and then gradually move into investing in individual stocks. You may love it and eventually move completely into individual stocks. But starting off at a foundation of index funds, maybe some actively managed funds, I think is the best way to start. Well, Stephanie, thank you for joining us.

[Stephanie Marini]

Thanks for having me.

[Podcast Advertiser/Host]

Some of the best lessons don't come from a classroom. They come from experience. On the Power of Advice, a new podcast series from Capital Group, you'll hear from CEOs, investors and founders about how they built careers, took risks, and reinvented themselves. If you're starting your own journey, this is the kind of advice you won't want to miss. Available wherever you get your podcast published by Capital Client Group Inc.

[Robert Brokamp]

It's time to get it done, fools. And as a follow up to my conversation with Stephanie, I'm going to suggest that you look at every investment you own and ask two questions. The first is, if you didn't own this investment, would you buy it today? This is not about whether you're happy you bought it back when you did. It's about whether you'd buy it today, given your assessment of its future prospects. Now, the past might play a role right in the decision. You might evaluate the performance of a company's leadership up to this point, or maybe the performance of a fund manager if you own actively managed funds. But if Your portfolio were 100% cash that you wanted to deploy, would you buy that investment? If the answer is no seriously consider why you're still holding it. Of course, considering any tax consequences of selling and speaking of taxes, here's the second question to ask of each of your investments. Is it in the right account? Are your tax inefficient investments in your tax advantaged accounts? Are you using your taxable brokerage accounts for low or no yielding stocks that you plan to hold on to for a really long time? Are you putting the investments with the greatest growth potential in your Roths? If not, you might want to do some rearranging again while being mindful of the tax consequences. And that, my foolish friends, is the show. Thanks for listening. And thanks as always to Bart Shannon, the engineer for this episode. People on the program may have interest in the investments they talk about, and the Motley fool may have formal recommendations for or against. So don't buy or sell investments based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertising. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show Notes. I'm Robert Brokamp. Full on everybody.