12 Types Of Investment Accounts In 2023 [The Complete Guide]
Understanding the diverse investing world can feel daunting, even for the savvy. However, your journey to financial success begins with a single step - in this case, starting an investment account.
Today, we will make this part of your journey easier by outlining and simplifying the '12 types of investment accounts.
You don't need to be an expert in finance or a Wall Street wizard to get started; you only need a keen interest in securing your financial future.
Now, you might wonder why there are so many investment accounts. Each account caters to varying investment options, goals, and tax benefits that suit different individuals' needs.
You may want an account for retirement savings, or perhaps you're planning for a significant expense down the road - whatever your goals may be, there’s no shortage of ways to invest toward achieving them.
Don’t worry if it feels overwhelming; by the end of this article, you’ll have a clearer picture of which investment account could work best for your financial objectives.
12 Types Of Investment Accounts In 2023
Securing your financial future often begins with choosing the right investment account. But with a multitude of options available, picking one can seem daunting. To streamline this process, here’s an overview of 12 different types of investment accounts.
Cash Brokerage Accounts
A Cash Brokerage Account is an investment account that anyone aged 18 years or older can open. It is called a "cash" account because all transactions must be made with the cash available at the time of the transaction.
In a Cash Brokerage Account, you can invest your money in securities like stocks, bonds, ETFs (Exchange-Traded Funds), and mutual funds. When you sell securities, the cash from the sale will remain in your account until you decide to reinvest it or withdraw it.
Unlike certain retirement accounts, there are no specific tax advantages associated with a Cash Brokerage Account and no penalties for withdrawing money at any time. It hence offers more liquidity and flexibility than other types of accounts.
Margin Brokerage Accounts
A Margin Brokerage Account is an investment account that allows accredited investors aged 18 years or older to purchase securities by borrowing part of the purchase amount from the brokerage.
This type of account can be used to invest in various types of securities such as stocks, bonds, ETFs (Exchange-Traded Funds), and mutual funds.
The "margin" refers to the difference between the total value of securities held in an investor's account and the loan amount from the broker.
An investor must first deposit equity, usually cash or securities, into a margin account before they are eligible to trade on margin.
While Margin Brokerage Accounts offer higher profit potential due to increased buying power, they also come with more risks since losses can exceed your original investment.
You may be subject to a margin call requiring you to deposit more cash or sell securities from your account. Thus, they are typically recommended for experienced investors who understand these risks.
401(k) Plans Retirement Accounts
A 401(k) plan is a retirement savings account many employers offer. Employees can contribute a portion of their pre-tax salary into this account, which grows tax-free until retirement.
Employers may also choose to match a percentage of the employee's contributions to the 401(k).
This type of retirement plan is named after Section 401(k) of the Internal Revenue Code and provides a valuable way to save for retirement.
Roth 401(k) Retirement Accounts
A Roth 401(k) is a retirement savings account where contributions are made after tax. This means you pay taxes on the money before it goes into your account, but withdrawals in retirement are tax-free, providing a significant tax advantage.
Unlike a traditional 401(k), a Roth 401(k) does not require you to start withdrawing funds at a certain age. There's one aspect to consider: you can only withdraw your amount without penalty after reaching the age of 59.5 years old, not 62.5.
Before that age, withdrawals may be subject to income tax and a 10% early withdrawal penalty unless specific exceptions apply.
SEP IRA Retirement Accounts
A SEP (Simplified Employee Pension) IRA is a retirement savings account suitable for small business owners and self-employed individuals.
Contributions to a SEP IRA are made by the employer only and are tax-deductible for the business.
To be eligible for a SEP IRA, an employee must be at least 21 years old, have worked for the employer in at least three of the last five years, and have received a minimum compensation of $600 from the employer during the current year.
These requirements make it an advantageous retirement plan option for small businesses and self-employed professionals.
SIMPLE IRA Retirement Accounts
A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a retirement savings plan designed for small businesses with 100 or fewer employees who do not have access to any other employer-sponsored retirement plans.
Both employers and employees can contribute to a SIMPLE IRA. Employee contributions are made pre-tax, while employer contributions can be matching or non-elective.
Any small business owner looking for a straightforward and lower-cost retirement plan option for their employees can open this type of retirement account.
Solo 401(k) Retirement Accounts
A Solo 401(k) is a retirement savings plan specifically designed for self-employed business owners with no employees (other than a spouse, if applicable).
The account holder can contribute as both the employer and the employee, allowing double contributions and larger tax deductions.
This plan offers high contribution limits compared to other self-employed retirement plans, making it an excellent choice for small business owners seeking to maximize their retirement savings.
Traditional IRA Retirement Accounts
A Traditional IRA (Individual Retirement Account) is a retirement savings account that anyone with earned income can open.
Contributions to a Traditional IRA may be fully or partially deductible, depending on your circumstances, which can provide an immediate tax saving. Withdrawals from a Traditional IRA during retirement are taxed as ordinary income.
This retirement account offers flexibility regarding investment choices, making it a popular option for individuals seeking to increase their retirement savings.
Roth IRA Retirement Accounts
A Roth IRA (Individual Retirement Account) is a retirement savings account that allows qualified withdrawals to be made tax-free in retirement.
With a Roth IRA, contributions are made with after-tax dollars, meaning you don't get an upfront tax deduction, but your funds grow tax-free and can be withdrawn tax-free upon retirement.
There are income limits for eligibility to contribute to a Roth IRA. For 2022, if you are single, head of household, or married filing separately (and didn't live with your spouse during the year), the phase-out range begins at $129,000 and ends at $150,000.
If you're married and filing jointly or a qualifying widow(er), the phase-out range is between $204,000 and $210,000. Thus, if your annual earnings exceed these limits, your contribution limit may be reduced, or you may not be eligible to contribute to a Roth IRA.
529 Education Savings Accounts
A 529 Education Savings Account is a tax-advantaged plan to encourage saving for future education costs.
These state-sponsored plans are named after Section 529 of the Internal Revenue Code and can be used to meet college and sometimes k-12 education expenses.
Any adult can start a 529 account—whether it's parents investing for their child's future educational expenses or an 18-year-old setting up an account for his or her benefit.
Contributions to these plans are made with after-tax dollars, but your investment grows tax-free and withdrawals used for qualified education expenses are also tax-free. It's a powerful tool in preparing for future educational costs.
It should be noted that laws relating to the eligibility age to open such an account may vary from state to state, so it's always best to check the specifics of your state's 529 plan regulations.
Coverdell Education Savings Accounts
A Coverdell Education Savings Account (ESA) is a tax-advantaged investment account created to encourage saving for future educational costs from kindergarten through college.
Contributions are made after-tax but grow tax-free, and withdrawals for qualified education expenses are also tax-free.
To be eligible to contribute to a Coverdell ESA, your modified adjusted gross income (MAGI) must be less than $110,000 if filing as a single taxpayer or less than $220,000 if filing a joint tax return.
The maximum annual contribution limit per beneficiary is currently $2,000. These accounts provide flexibility because funds can be used for K-12 expenses and higher education costs.
Health Savings Accounts
Health Savings Accounts (HSAs) are tax-advantaged medical savings accounts for individuals enrolled in a high-deductible health plan (HDHP). Contributions to an HSA are made pre-tax, and funds may be used to pay for eligible medical, dental, and vision care expenses not covered by your insurance plan.
For 2022, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. If you have an HDHP, you can contribute up to $3,650 as an individual or $7,300 as a family into an HSA.
These contributions are 100% tax-deductible from gross income. Note that you can contribute additional' catch-up' contributions if you are 55 or older at the end of your tax year. The catch-up contribution amount for HSAs is $1,000.
FAQs about investment accounts
Why should I consider multiple types of investment accounts?
Diversifying with various investment accounts can help mitigate risk and allow you to achieve different financial goals.
Who can open a 401(k) plan or Roth Retirement Account?
Typically, these accounts are opened through your employer. Self-employed individuals may opt for a Solo 401(k).
Can anyone start an education savings account like a 529 or Coverdell?
Yes, these accounts are generally available to anyone regardless of income level and can greatly benefit future education expenses.
What’s the difference between a Traditional IRA and a Roth IRA?
The primary difference is when you pay taxes. In a Traditional IRA, contributions are tax-deductible in the year they're made, whereas Roth IRA contributions are made with after-tax dollars.
Are Health Savings Accounts considered investment accounts?
Yes! While primarily used for health expenses, HSA funds can be invested much like IRAs or 401(k)s.
In navigating the investing landscape, understanding your options is key. With several investment accounts, you're never short of ways to enhance your financial portfolio and secure a more stable future.
It's crucial to pinpoint your financial objectives, know each account's tax benefits, and understand the associated risks before opening an account. Remember, the right information is your greatest weapon for successful investing.
Don't let confusion or fear hinder your progress toward achieving financial freedom. Use this guide to make an informed decision about the best investment account for you.