5 Types of Investment Accounts You Should Know About

If you’re ready to start investing but aren’t sure where to begin, one of the first things you need to understand is investment accounts and what they are. Investment accounts are the foundation of investing. These accounts hold your stocks, bonds, ETFs, mutual funds, and more. Unlike a traditional savings account at your bank, an investment account fluctuates with the market. Simply meaning that its value can rise or fall based on the market and what your investments are.

There are several investment account types, each serving different financial goals. Whether you’re looking for an investment account for beginners or planning for retirement, there’s an option that fits your needs. In this post, we’ll go over five types of investment accounts, their features, different tax implications, and how to get started.

1. Standard Brokerage Investment Accounts

A standard brokerage account is the most flexible type of investment account. It allows you to buy and sell investments such as stocks, bonds, ETFs, index funds, and mutual funds at any time. An easy way to think about this account is as a specialized savings account that you use for investing in securities. There are two primary types of standard brokerage accounts.

Self-Directed Brokerage Account

A self-directed brokerage account is exactly what it sounds like – an investment account that you manage entirely on your own. The biggest advantage of this is that it comes with little to no fees since you are in full control. However, this also mans you are responsible for all investment decisions, from researching the securities to determining which ones align with your financial goals. While this level of control can be beneficial, it also requires a lot of time, effort and a solid understanding of the market.

Managed Brokerage Account

A managed brokerage account is overseen by a financial professional who handles investment decisions on your behalf. This is option is considered passive investing as the advisor conducts all the research and manages your portfolio for you. Thile this account does offer more convenience along with professional expertise, it will also have higher fees associated with it.

Fees: Many brokerage accounts have little to no fees, but some may charge trading fees or management fees if you use a financial advisor.

Taxes: Unfortunately, a standard brokerage account does not offer any special tax advantages. You have to pay taxes on any capital gains, or profits, earned when you sell investments. You will also have to pay taxes on dividends and interest earned in these accounts.

How to Open an Account: Opening a brokerage account is fairly straightforward. You can open one up online or go in person to a physical brokerage firm. You will need standard personal information, such as an id and social security number, a bank account for funding, and a brokerage firm to work with. If you decide to go in person to open an account, it is a good idea to check online for everything you will need to bring before you arrive at the firm.

Good to Know: There is no monetary limit on a brokerage account, so you can invest as much money as you would like. You don’t need a lot of money to start investing. Many accounts let you open one for free and begin investing with just a small amount!

2. Retirement Accounts

Retirement accounts help you save for the future. These accounts offer various tax advantages, which differ depending on the account. The two most common types of investment accounts for retirement are IRAs and 401(k)s.

Traditional IRA

A Traditional IRA (individual retirement account) is a retirement account you open up yourself. Depending the account, contributions may be tax-deductible. The investments grow tax-deferred until you withdrawal from the account in your retirement. When you make withdrawals, they are taxed as an income.

Roth IRA

A Roth IRA is similar to a Traditional IRA but with different tax advantages. You contribute to the account with after-tax money, meaning the money is taxed as it goes into the account. This is advantageous as when you withdrawal the money in retirement these withdrawals (including the growth on the account) are tax-free.

401(k)

A 401(k) is different from IRAs as it is an employer-sponsored retirement account. This simply meaning, you can only open a 401(k) through an employer in which you work full time with. The contributions that are made are pre-tax while your withdrawals in retirement are taxed. The employer will often match up to a certain percentage of your salary in contributions to the 401(k) – in this case it is usually best to ‘max your match’ as it is free money.

Fees: Some retirement investment account providers charge fees, but many offer low-cost options.

Taxes: Depending on the account you choose to open you will either be taxed on your contributions (Roth IRA) or your withdrawals (401(k) and Traditional IRA).

How to Open: IRAs can be opened through a brokerage. 401(k)s are provided by employers.

Good to Know: If you make early withdrawals from your retirement accounts (before age 59½) this may come with penalties. Investment accounts for retirement are best for long-term investing strategies.

3. Investment Accounts for Kids

Investing for your child’s future is a great way to set them up for financial success early on. Whether you are wanting to help the build long-term wealth or teach them about investing, there are specialized accounts for these goals. If you are considering starting and investment account for your child, there are two key options to choose from.

Custodial Brokerage Account (UGMA/UTMA)

A custodial brokerage account works similarly to a standard brokerage account. The biggest difference is that a parent or guardian will manage the account until the child reaches adulthood (18 or 21, depending on the state). Like a standard brokerage account, you can use these funds for any purpose, and you can manage them yourself or have a financial professional manage them.

Custodial IRA

A Custodial IRA is an individual retirement account for minors, specifically who earn income. These accounts work similarly to a regular IRA but they under a parent’s supervision.

Similar to regular IRAs, you have the option of opening up a Custodial Traditional or Custodial Roth IRA. These will have similar tax implications as the Traditional or Roth IRAs.

Fees: Vary by provider, but there are many options that have no fees or very low costs.

Taxes: Investment accounts for children can be tax advantageous as the earnings are often taxed at the child’s lower tax rate.

How to Open: Parents or guardians can open these accounts online or at most brokerage firms. You will need the standard personal information (for the parent/guardian and the child) and a bank account for funding.

Good to Know: Once the child reaches the legal adult age (this is dependent on the state), they will gain full control over the account.

4. Education Investment Accounts

Not only are there investment accounts that you can open for your children, but there are some specific to education. These accounts help with future tuition costs while offering various tax benefits. There are two common types of investment accounts specific for education.

529 Savings Plan

A 529 is a state-sponsored savings plan that allows money to grow tax-free if it is used for qualified education expenses. Given the money does grow tax free, it has contribution limits. A big advantage of this plan is that it is not limited to college expenses. You can also use the money within the account to pay for tuition in K-12 grades.

Coverdell Education Savings Account (ESA):

An ESA operates as a trust account that is created by the government. Like the 529 Savings Plan, you can use the money in the ESA for education other than college, such as k-12 expenses.

Fees: The fees associated with these accounts will vary by plan, but there are many that have low-cost options.

Taxes: Withdrawals for education expenses are tax-free. If you don’t use the money for education purposes you will face penalties.

How to Open: These accounts are available through brokerage firms as well as state agencies.

Good to Know: 529 Savings Plans can only be used for tuition. ESAs can be used for tuition, books, and other educational expenses.

5. Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a lesser-known investment account that offers tax advantages for medical expenses. In order to qualify for an HSA, you must have a high-deductible health plan (HDHP) to be eligible. Further, you cannot be claimed as a dependent or be enrolled in another health plan.

Fees: Some providers charge maintenance fees, but many offer no-fee options.

Taxes: HSAs can be very tax advantageous – they have triple tax benefits! Contributions to the account are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

How to Open: HSAs are offered through banks, credit unions, and brokerage firms.

Good to Know: HSAs can be invested in stocks, funds, and other assets, making them a powerful long-term investment tool.

Choosing the Best Investment Account for You

With so many investment account types available, how do you know how to choose the best investment account for you? It depends on your different financial needs and goals. As each account offers different advantages and disadvantages.

No matter your financial goals, understanding investment accounts is a key foundation to building wealth. Whether you’re looking to learn more about the investing basics, open your first investment account for beginners or looking for the best investment account for long-term savings, there is an option out there for you. Take the time to do your research, explore your choices, and start investing with confidence!

Disclaimer:

The information provided in this post is for informational and educational purposes only and should not be considered financial, investment, or legal advice. I am not a financial advisor, and any investment decisions you make should be based on your own research and consultation with a qualified financial professional. Investing carries risks, and past performance is not indicative of future results. Always do your due diligence before making any financial decisions.