Paid Non-Client Promotions: Affiliate links for products on this page are from partners who provide compensation to us (see our advertiser disclosure with a list of partners for more information). However, our opinions are our own. Find out how we rate investment products to write unbiased product reviews.
- Wealthy people use many accounts to build their wealth, and three accounts are widely available.
- They use retirement accounts like IRAs and 401(k)s to get tax benefits and free money.
- And they prefer to buy low-cost index funds in their brokerage accounts to build accessible wealth.
In general, high-income and wealthy people tend to have quite a few habits in common. Many people are frugal and look for ways to get the most out of their money and want to minimize the amount of taxes they pay later.
Wealthy people use three types of accounts all the time to get more out of their money, but they're hidden from view.
Wealthy people use Roth IRAs for tax benefits
Wealthy people are always looking to minimize their tax impact, and the Roth IRA is designed to do just that. In 2021, PayPal founder Peter Thiel's Roth IRA account gained attention for the strategy he used to grow the account from $1,700 to $5 billion, ultimately allowing for completely tax-free withdrawals.
A Roth IRA minimizes later tax bills by allowing you to deposit only funds made after taxes. Although a Roth IRA won't lower your taxes now like a traditional IRA, a Roth IRA allows you to withdraw your funds tax-free after they grow.
Roth IRAs have income limits, but that doesn't mean wealthy or high-income individuals can't use them. A backdoor Roth IRA turns your traditional IRA into a Roth IRA tax-advantaged account, allowing you to transfer funds from one type of account to another. Although growth may be taxed when transferring accounts, this method gives those who earn above the income limits the opportunity to contribute to a Roth IRA.
Wealthy people use their employer's 401(k) plans
A study of 10,000 millionaires found that the most common account type was the A 401(k). According to a study by Ramsey Solutions, 8 out of 10 millionaires had this common account in their portfolio.
Workplace 401(k) plans may seem like an unlikely place to accumulate wealth, but these accounts offer powerful benefits. As well as offering the benefit of an employer match where you can essentially earn free money, there are also tax benefits such as lower taxable income.
To find out if your employer offers a 401(k) program and find out about available matching programs, contact your human resources department.
they use brokerage accounts
Retirement accounts are a great place to save and build wealth, but there's one big problem. That means the money is only available penalty-free under certain circumstances, such as reaching a certain age. For people who want to retire early or save for a goal closer to retirement, a brokerage account is the right choice.
Brokerage accounts also allow you to save and invest a variety of funds. Index funds are popular with billionaires and wealthy individuals because of their low costs, and are favored by investors like Warren Buffett, according to Hilary Hofower of Insider magazine.
By purchasing and holding index funds in your securities account, you can maintain and expand your assets over the long term.
This article was originally published in July 2021.
