If you’re looking to start investing, the initial selection of an investment account application can be confusing. What kind of investment account do you need? There are actually a lot of different accounts for different purposes, so let’s talk a little bit about the more common accounts offered by most discount brokerages. I’ll try.
Remember, investment accounts are like vehicles, but your real investments are your passengers. Depending on the vehicle you own, you can only carry a certain number and type of passengers. In addition, other specific rules apply. That’s how accounts work. Within your account, you hold stocks, bonds, mutual funds, and more. Some accounts have limits on how much you can deposit and there are rules about what kind of investments you can hold in certain types of accounts.
First, there are two main differences between accounts: Brokerage and Retirement. There are also some professional accounts. You can access your brokerage account at any time to deposit and withdraw funds. Retirement accounts have annual investment limits and can generally only be withdrawn at retirement.
Both types have their advantages. Brokerage accounts can be invested in any investment product and can be leveraged or short positions. Retirement accounts are somewhat restricted in what you can invest in, but they usually offer some tax benefits.
securities investment account
cash – A cash brokerage account is the most basic form of investment account. Also known as a standard brokerage account. This account type is funded by cash and can only be invested with cash in the account. This account only accepts cash, so you are limited in what you can do. For example, you cannot participate in certain options trading and you can sell short. If you are interested in this kind of trading, you should look for a margin account. Everything you do with your cash account is taxable, so choose your investments carefully.
Check out our guide comparing the best brokerage accounts here.
Margin – Margin accounts are very similar to cash accounts except that you can trade on margin. This means that you can borrow from the brokerage when you trade. You still need some capital, but you can usually borrow up to 50% of your holdings. A Margin account allows you to do all sorts of trading, including options trading and short selling. All this is due to the fact that it is borrowed from a broker to conduct trades. Like cash accounts, margin accounts are fully taxable.
retirement investment account
There are many different investment avenues when it comes to retirement savings. An IRA is the main type that can be opened. You may be familiar with a 401k or 403b, but these are employer-sponsored plans, not individuals opening these accounts.
Traditional IRA – A traditional IRA (Individual Retirement Account) is a savings vehicle that allows you to save up to your IRA contribution limit and invest in your retirement funds. An advantage of using a Traditional IRA is that the donation amount is often tax deductible. When you deposit funds into your account, you defer taxes on everything you do and trade. You will only pay taxes when you withdraw your retirement benefits, but you will pay them at your normal income tax rate.
Check out our recommendations for the best places to open an IRA account.
Ross IRA – A Roth IRA is similar to a Traditional IRA, except that after-tax funds are used to invest. Within your account, both Roth and Traditional IRAs behave similarly. However, with a Roth IRA, when you withdraw money after you retire, you won’t be taxed on that money.
For these accounts gambling is: Do you think you belong in the higher tax tier now or later? If you currently pay high taxes and expect to pay less in retirement, a traditional IRA makes sense because you can start getting tax relief today. However, if you have a low tax rate now and plan to have a high tax rate when you retire, a Roth IRA is a better choice.
September Islay – A SEP IRA is designed for the self-employed. In fact, it stands for self-employed pension. Any self-employed person can initiate a SEP IRA, very quickly and easily. In fact, if you are a freelancer or someone with a side business, this is the perfect account to open. These accounts have very high limits, you can donate more than 25% of your income to this account.
401k- A 401k is a workplace-sponsored retirement investment account. It can be sponsored by your employer, or you can be self-sponsored if you are self-employed (hence a Solo 401k). The great thing about a 401k is that the amount you can donate is significantly higher than you can give with an IRA. A 401k has employer and employee contributions, and some employers offer equal contributions.
403b- A 403b is similar to a 401k in that it is a workplace-sponsored retirement plan, but it is for nonprofit or tax-exempt organizations. The 403b contribution limit is the same as the 401k, and many employers offer similar contributions here.
education savings account
529 plan – The 529 plan is an education savings account that was once primarily used for college, but can now be used for K-12, student loans, and other qualifying expenses. This account has an account holder (usually a parent or grandparent) and an account beneficiary (usually a child). This is a great tool that allows you to defer taxes so that you have more money inside, and that money is tax-free when used for qualifying expenses. Additionally, most states also offer tax deductions for donations.
Read our complete guide to where you can open a 529 plan in your state.
Coverdell Education Savings Account – The Coverdell Education Savings Account (previously known as the Education IRA) is another account that families can use to save for K-12 and college. These accounts are not as popular as the 529 plans, especially because of their lower contribution limits, but they do offer some advantages, especially when it comes to expenses.
health savings account
Health Savings Account – A Health Savings Account (HSA) is a popular way to save for retirement as well as medical expenses. This account has a 3x tax advantage and many people use this account as an IRA for non-medical purposes.
Employers can also open an HSA for themselves if they are eligible. You can even roll over his old HSA to your new account. See our list of best HSA providers here.
What type of investment account should I open?
If you’re just starting to invest and don’t plan to access your investments until you retire, you should consider a retirement account. These accounts have many tax benefits and are designed for long-term investment strategies.
Margin accounts are recommended if you want to “play” or speculate in the stock market. This is very similar to a cash account, but if you want to tackle more advanced investment strategies, this account will give you the flexibility you desperately need.
And if you want to save and invest for the future, always use free money. So, if you have a 401k match, HSA match, or other free money, start investing there!
What type of investment account do you have? Do you have any plans to open other investment accounts?