4 types of investment accounts you should know
If you like having options, you have plenty of them when it comes to types of investment accounts. What will an IRA be? Taxable account? College savings account? This is one of the first questions financial companies ask themselves when you create an account.
This guide to the different types of investment accounts will help you find the best one based on your savings goals, your eligibility, and who you want to keep in the account (yourself, you, and someone else). other, or even a minor).
Types of investment accounts
1. Standard brokerage account
A standard brokerage account – sometimes referred to as a taxable brokerage account or a non-retirement account – provides access to a wide range of investments, including stocks, mutual funds, bonds, exchange traded funds and more. Any interest or dividends you earn on investments, as well as gains on investments you sell, are subject to tax in the year the money is received.
With a non-retirement account, you have a choice of ownership:
Individual Taxable Brokerage Account: Opened by an individual who retains ownership of the account and will be solely responsible for taxes generated in the account.
Joint Taxable Brokerage Account: An account shared by two or more people, usually spouses, but can be opened with anyone, even a non-parent.
When you open a brokerage account, the business will likely ask you if you want a cash account or a margin account. A cash account is suitable for most investors. It allows you to buy investments with the money you deposit into the account. A margin account is for investors who want to borrow money from the broker to buy investments. Margin trading is a riskier type of investment that is best suited for advanced traders.
Eligibility: You must be of legal age (at least 18 years old) and have a social security number or a tax identification number (among other forms of identification) to open a brokerage account.
Good to know: There is no limit on how much you can put into a taxable brokerage account, and the money can be withdrawn at any time, although you may owe taxes if the investments you sell for cash have increased over time. value.
2. Retirement accounts
A retirement account, such as an IRA, or an individual retirement account, is a standard brokerage account with access to the same range of investments. The biggest difference between a retirement account and a brokerage account is how the IRS taxes – or not – contributions, investment earnings, and withdrawals.
Depending on the type of IRA you choose, you either get an initial tax break the year you make contributions to the account (with a traditional IRA) or a final tax break that makes your withdrawals tax exempt (via a Roth IRA). Joint IRAs are not allowed.
Eligibility: You must have earned income (or a spouse with qualified earned income) to be eligible to contribute to an IRA. There are also income limits for contributing to a Roth IRA and for deducting contributions to a traditional IRA. Learn more about IRA eligibility rules here.
Good to know: The maximum that an individual is allowed to contribute to an IRA is $ 6,000 in 2021 ($ 7,000 if he is 50 or older). According to IRS rules, there may be taxes and penalties for tapping into IRAs before the age of 59 and a half. If you think you need to access the money sooner, the Roth IRA offers more options without penalty.
These providers offer many tools and tips for savers looking for a place to open an IRA.
3. Education accounts
One of the most popular types of accounts used to pay education costs is the 529 savings plan. (This is different from the 529 prepaid tuition plans that allow you to lock in public tuition at the institution that manages the plan.) Most states offer their own 529 plans that you can open directly, but typically the money can be used at qualifying schools nationwide. Some brokerage firms also allow you to open a 529 account. For example, TD Ameritrade offers 529 accounts through the Nebraska plan, and Wealth front offers them across Nevada.
Another education savings option is the Coverdell Education Savings Account. An ESA must be in place before the beneficiary is 18, and like the 529s, the money can be used for college, elementary and secondary education expenses.
Eligibility: Parent or not, anyone can contribute to these plans on behalf of a beneficiary. And anyone can be named the beneficiary of the account, as long as the money is used for qualifying educational expenses.
Good to know: Contributions to the 529 and ESA are not tax-deductible (although you can claim a state tax deduction on the 529 contributions), but qualifying distributions are tax-exempt.
4. Children’s investment accounts
The above investment accounts require the owner to be at least 18 years of age. But what about brokerage accounts for the young budding Buffett you know? There are several options for accommodating minors:
Brokerage account on deposit
This investment account is opened for a minor with money that is offered to the child. An adult (the custodian) controls the account and transfers the assets to the child when they reach “the age of majority,” which is 18 or 21, depending on state laws.
Two types of custody accounts are the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The difference is in the type of assets that you are allowed to contribute to the account. UTMAs can hold real estate, in addition to the typical investments allowed in both types of accounts (cash, stocks, bonds, mutual funds). Once the money is in the account, it cannot be transferred to another beneficiary.
Eligibility: A child does not need earned income for a UGMA. Some states allow UGMAs, others UTMAs, and others both. A broker can determine if your state allows you to open one for a beneficiary.
Good to know: Unlike money in an education account, money placed in a UGMA or UTMA can be used for any purpose, not just for tuition. And be aware that if the child applies for financial assistance, the assets in a custody account are considered the student and may impact their eligibility and the amount of assistance.
If a child has earned income, they are eligible to contribute to a Roth or traditional IRA. The account is opened and managed by an adult who transfers it to the child when he turns 18 or 21.
Eligibility: Earned income can come from anything including babysitting, an informal lawn mowing business, or Instagram sponsorships, as long as it is reported to the IRS.
Good to know: In a Roth IRA, contributions – but not investment income – can be withdrawn at any time without incurring income tax or an early withdrawal penalty.
Where to open your investment account?
Most financial institutions offer, at a minimum, standard brokerage accounts and IRAs. Many also offer education savings accounts and custody accounts.
If you want someone to manage your money for you, a full service broker (a company with a investment advisor calling the shots) or a robo-advisor can take the reins. A robo-advisor is an inexpensive and automated tool Portfolio Management service, which charges a nominal fee for monitoring your investment portfolio.