Confused on which investment account is best for you? This is quite understandable as it is not easy to know which investment account is best for you sometimes. Be it as it may, there are so many types of investment accounts out there. As such, it can be difficult to decide on which one is the best fit.
Here we will be listing the different types of investment accounts, their benefits, as well as who should invest in each one. There are four types of investment accounts – individual brokerage account, IRA, 410K, and 529 College Savings Account.
Types Of Investment Accounts 2021 (The Complete Guide)
Let’s start with a detailed analysis of the four different types of accounts.
Individual Brokerage Account
An Individual brokerage account is an account that which a single person invests with brokers. The good thing about this account is that it’s completely separate from any retirement or other savings plan you may have. It also gives room for more investment freedom as compared to what other plans offer. Another plus is that opening an individual account is a little easy process and comes with lots of benefits. However, it does have its disadvantages which you should be aware of before opening one up.
- You have the sole responsibility when it comes to choosing which stocks or bonds to invest in. You have the sole prerogative when it comes to making investment decisions, no one else helps you.
- In case anything goes wrong with a company for which you’ve purchased stock, there’s nobody who can fix things. This is because the investment in this type of account is solely yours. This implies that if something like bankruptcy happens, you’ll end up losing everything invested even though everyone was affected by what happened in the business.
An IRA is an account designed to help users save for retirement. This is typically done by investing in stocks or bonds.
With a Roth investment account:
- You need to earn income each year. Also, your contributions are limited based on the type of IRA you are using. This is not an option if you don’t make enough money.
- There may be penalties as there’s always a set deadline when the time comes to withdraw funds from these types of accounts. This implies that even though you have contributed the same amount as someone else who opened up any other investment account, they may actually end up with more than what you do at some point along the line. This is because their investments were allowed more time to grow over those years.
The rules of tax-advantaged accounts can be quite tricky. Here are a few things you have to note about IRAs:
- You may have to take a required minimum distribution (RMD) before age 70.
- Contributions are limited based on the type of IRA you are using and whether or not you have any earned income each year. This is not an option if you don’t make enough money.
For Roth IRA, contributions may be tax-deductible. You don’t need to take an RMD in retirement. This is because the contributions are withdrawn first (and taxes are paid on them).
Traditional IRA – Here, contributions may not be tax-deductible, but you’ll only pay taxes when withdrawing at a later date.
SEP IRA – This investment option is available for self-employed individuals with no employees. It offers both the benefits of traditional IRAs and Social Security coverage if your employer does not offer it or you’re self-employed without other income that would qualify you for this benefit.
SIMPLE IRA – Simple IRA accounts can have lower investment requirements than SEPs. This is because they usually do not allow rollovers from 401(K)s and offer smaller employers the ability.
A 401(K) investment account is an account that your employer sets up for you. It can also be an account that’ll match a portion of what you contribute. However, as an employee, you are to pay these taxes on your own.
401(K) is a specific % of your income that you are taxed on. It is also a percentage you will contribute to the account as well as a percentage that your employer will match.
A 403(b) is just like 401K, which public schools, universities, or other tax-exempt employers can offer. As an employee in this case, you will still be required to pay these taxes on your own.
Employee 401K accounts on the other hand are a type of investment account. These types of accounts are tax-deferred or deducted from regular income taxed at your standard rate. It is then put into an account where the investments can grow without you having to pay taxes on them until you withdraw money out.
Retirement plans which include 401K, 403bs, or pensions all follow this same basic principle. It is just some variations in taxation rates based on how much is contributed by both employer and employee each year.
The contribution limits for Employee Retirement Plans (ERPs) will depend on what type it is and whether there’s one set up via a private company plan like United Airlines Federal Savings Bank Profit Sharing Plan B.
Apart from the four types of investment accounts stated above, here are other Corporate Sponsored Accounts. We have listed these rare common accounts that companies offer their employees. Here they are:
- Solo 401K
- SEP IRA
- Simple IRA
529 College Savings Account
The 529 College Savings account does not have to be used for college tuition only. This account can be used just like an Individual Retirement Account (IRA) and make contributions up until the age of 18 for that child’s education or for another purpose.
The account is designed to help you save for a beneficiary’s future college tuition, home, etc. This account is otherwise known as an education savings account.
It can be quite difficult to make a choice or know the right investment account to choose from. This is because of the array of options out there. However, you can still make a choice after weighing the pros and the cons of each type of investment account.