There are a variety of options that you can choose from when you are opening an investment account. It all depends upon your resources and requirements. Opening an investment account can be due to multiple reasons such as saving for retirement, saving for a down payment on a home, growing your wealth, or saving for elementary or secondary education. It is better to know all about your options and learn everything regarding each type of investment account so that you can make an informed decision that will be beneficial for your future.
We have composed a list of types of investment accounts. Although there are some things that you should consider before opting for any of the investment accounts:
- Your Investment Goal:
Depending on your investment goals and the reason why you are saving, some accounts may be more ideal for you than others to achieve those goals quickly. If you’re investing for a college fund for your child then you might choose for Education account.
- Fees or Charges:
Depending upon which financial institution or brokerage you open an account with, the fees or charges may differ. Consider these before you opt for any of the account types.
- Conditions:
Some conditions may apply based on what type of investments you can purchase within your account or if you choose a financial advisor, what types of trading they can do.
Here are the most common 4 types of investment accounts that people require and their details such as eligibility criteria, taxation, and ownership.
1. Standard Brokerage Account:
Also termed as a taxable brokerage account or a non-retirement account, a standard brokerage offers you a variety of investments including everything from bonds to mutual funds to exchange-traded funds to stocks. In a standard brokerage account, you have to pay a tax on any gains or interests that you earn on your investment. There are two types of ownerships available in a standard brokerage account:
- Individual: The individual taxable brokerage account is owned by the person who opens it and they are solely responsible for paying all the taxes generated in the account.
- Joint: A joint taxable brokerage account can have the ownership shared by two people, mostly spouses.
While opening a standard brokerage account, you will have two options. Either you can open a cash account or a margin account. In a cash account, you are allowed to buy investments with the money that is deposited in your account, and in a margin account, you have to buy investments with the money you have borrowed from your broker. A cash account is a more suitable and stable option as margin accounts can get riskier and are suited for advanced traders with a lot of experience.
2. Education Accounts:
Education accounts are used to save for educational expenses and are usually set up before a child turns 18 to save up for their elementary or secondary education like college or university. One of the most common types of education accounts is the 529 saving plan. Each state has its own 529 saving plans that you can open directly although some of the brokerages also offer 529 plans. Another education account option is the Coverdell Education Savings Account or an ESA. Anybody whether a guardian, relative, or non-relative can contribute to an education account as long as the money is used for qualified educational purposes. A person can also open an educational account for themselves if they are above the age of 18. Any contributions made to 529 accounts or ESA are non-taxable which means you will not have to pay their tax.
3. Retirement Accounts:
Retirement accounts are made for saving for your retirement. One of the most common types of retirement accounts is the traditional IRA which gives access to the same variety of investments as a standard brokerage account does. The only difference between an IRA and a standard brokerage account is the taxes that you have to pay on investment gains and withdrawals. Many brokers also offer special retirement saving accounts that are great for small-business owners or people who are self-employed such as Solo 401(k)s. A solo 401(k) account allows you to contribute to the account as both the employee and the employer.
If you open a solo 401(k) account, you will be able to invest in mutual funds, ETFs, stocks, and bonds. Depending upon the type of IRA that you choose, the tax payable will differ. Either you will get an upfront tax break that you will have to pay whenever you contribute to your account or a back-end tax which will help you make tax-free account withdrawals. IRAs have to be individual since joint IRAs are not allowed.
4. Investment Accounts for Minors:
All the investment accounts we have mentioned above have an eligibility criterion for the owner is at least 18 years old. But what if a minor requires an investment account? Well, this is where the custodial investment accounts come in. Custodial investment accounts allow the custodian to make payments and control the account and then gift or transfer all the assets of the account to the minor once they come of age.
A child does not need to earn any type of income to own a Uniform Gift to Minors Act (UGMA) account. This account differs from the Education Account in a way that the money stored in these accounts can be used for any purpose and not just for educational ones.
Investment accounts are a great way to make sure all your assets are secure. Most financial institutions offer all of these types of accounts and if you want help with managing the account then you can hire an online broker as well. However, if you want someone to fully control and manage your account then appointing a full-service broker is the way to go. They will manage all your account functions and money, as well as investments for you while charging you a small fee. Make sure you are well determined about your investment goals and know all about the account type you are opting for before for a decision to keep all your assets safe and secure and make good investment decisions.
