Summer is coming to a close, which means that your seasonal job is wrapping up for the year. Whether you took on a second job to earn some extra cash for a few months or will soon be looking for other means of employment, now is a great time to make a decision on how to invest the money you earned. Putting aside extra funds this summer was a financially savvy move — now you need to find the best place to store them so that you can reach your future goals.
As everyone’s financial goals are unique, there’s a variety of great ways to invest your summer savings. The following six financial vehicles are all smart ways to save money; keep reading to find out which is the right one for you and how you can best store and grow your summer savings.
1. Online Savings Account
Online savings accounts typically offer higher returns than those sponsored by brick-and-mortar banks, as they have lower overhead costs. Additionally, most have lower — if any — maintenance fees, and offer more accessibility and options than traditional banks. When choosing an online bank, make sure the institution is FDIC-insured, has an extensive ATM network, live customer service representatives and offers the perks you need to make your experience pleasant.
If you have a 401(k) account sponsored by another employer, placing your summer job savings into it is a great investment in your future. The 2014 401(k) limits allow you to contribute up to $17,500 this year, so just make sure this contribution won’t put you over. Be absolutely certain you won’t need the money until you’re at least 59 and a half, as early withdrawals are subject to a penalty fee of 10 percent additional tax.
3. Roth IRA
Whether you have an existing Roth IRA or are thinking of opening one, storing your summer job earnings in this vehicle is a great way to invest in your future. While certain income restrictions do exist, you can generally contribute up to $5,500 per year. When withdrawing your funds, you’ll never have to pay taxes on your contributions and as long as you wait until you’re 59 and a half and have owned the account for at least five years, you won’t have to pay taxes on your earnings either. Make sure you won’t need the money until you’re at least 59 and a half, as the IRS imposes a 10 percent early withdrawal fee tax on both earnings and contributions.
4. Certificate of Deposit
If you’re sure you won’t need access to your summer job funds for a few months or years, investing in a certificate of deposit can be a great option. Financial institutions pay you a higher interest rate than you would earn with a checking account or a money market account, simply for leaving your money alone throughout the term.
This is one of the most low-risk investments you can make, as the interest rate is pre-determined, so you’ll definitely profit. Many institutions roll your money over into another CD if you don’t need the money when your investment has reached full term, allowing it to be even more profitable. Just make sure not to withdraw your funds before the term ends, or you will likely be subject to an early withdrawal fee.
5. Money Market Account
Investing your summer job savings into a money market account could allow you to earn a more competitive return than offered by a general savings account. While the minimum balance required to open an account is often higher, ranging from $500 to $50,000, you are rewarded with higher returns. Interest is compounded daily or monthly and distributed to your account each month or quarter. While you’ll be limited to certain monthly withdrawal and transfer limitations, you can access your money or close your account at any time without incurring a penalty — unlike with CDs.
6. 529 Plans
Whether you’re saving up for your own college education or one of your children’s, investing your summer job earnings in a 529 savings account can help make this expense more manageable. These plans come in two different forms — pre-paid tuition plans and college savings plans. If funds are later withdrawn for qualified college expenses, earnings are not subject to federal tax and usually state tax as well. Make sure you plan on using this investment account for college expenses, or else you will likely be subject to a 10 percent federal tax penalty on earnings as well as income tax.
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