If you’re new to investing, the method can be a bit confusing. Which sort of investment account types should you choose, and what sort of brokerage should you use for that account? Sometimes you don’t have a choice with either. A simple example is an employer-sponsored retirement plan. The employer chooses not only the plan but also the investment trust where your account will be held. But things are more complicated with other types of accounts. Since those are primarily self-directed accounts, you’ll have to make decisions as to what type of plan you want and which investment broker you’ll hold it at. We’ll cover the various investment accounts first, then the varied types of investment brokers next. Quick Guide To the kinds of Investment Accounts:
- Taxable Brokerage Accounts
- Employer-Sponsored Retirement Plans
- Traditional and Roth IRAs
- SIMPLE and SEP IRAs
- Best Brokers to carry Your Investment Account
The Different Types of Investment Accounts You Can Open and WhyThere are two primary sorts of investment accounts, taxable and tax-deferred. A taxable account is one that you simply will have available to both contribute to and make withdrawals from at your option. You'll also choose what type of investment broker will hold the account. And once opened, you'll choose and manage the investments you’ll make. Tax-deferred accounts are primarily retirement accounts. There are limits to what proportion you can contribute to the plan. And since contributions are generally tax-deductible, there'll be tax consequences when you make withdrawals. Unlike taxable investment accounts, which may be used for any purpose and duration, tax-deferred accounts are primarily designed for retirement purposes. If you’re looking to open a taxable account or a pension plan that isn’t employer-sponsored, there are several choices on both plan types and investment brokers.
Taxable Brokerage AccountsA taxable account is an account that isn’t a tax-sheltered retirement account. And while you'll want to hold the majority of your investments in tax-sheltered plans, it is sensible to have at least some of your investments in a taxable account. However, taxable accounts offer little in the way of tax benefits. That’s why the bulk of your investment portfolio should be held in tax-deferred plans. Just as the name implies, any investment gains you earn during a taxable brokerage account will be subject to income tax. But having a taxable account will offer you access to the money in the account without having to incur the taxable distributions that come from early withdrawals from retirement accounts. That’s because contributions to taxable accounts aren't tax-deductible, and taxes are paid on investment gains as they’re earned. Generally speaking, your investment income is going to be taxed at your ordinary income tax rates. But the IRS provides a reduced rate on long-term capital gains. These are gains on investments you’ve held for quite one year. The rate on long-term capital gains is between 0% to 20%, with most taxpayers paying 15% or less. For that reason, taxable brokerage accounts are best suited to holding long-term investments. Taxable brokerage accounts are often open either individually or jointly with your spouse.
Employer-Sponsored Retirement PlansMany employers, and most large employers, offer sponsored retirement plans for their employees. The employer sponsors and administers the plan, and you because the employee fund it through payroll deductions. In most plans, you’ll even have a choice as to how you invest the money in the account. There are several different plans offered, including the following:
- 401k plans
- 403(b) plans
- 457 plans
- Thrift Savings Plans (TSPs)
Traditional and Roth IRAsIndividual retirement accounts, or just IRAs, are tax-sheltered retirement plans for people. Nearly anyone can have an IRA, as long as you've got the earned income to cover the contributions. For 2019, you'll contribute up to $6,000 per annum toward an IRA, or $7,000 if you’re 50 or older.
Traditional IRAsFor most taxpayers, your contributions are going to be tax-deductible. Almost like employer-sponsored retirement plans, you’ll pay tax on the cash as it’s withdrawn from the account. Once more, if withdrawals are taken before age 59 ½, you’ll even be subject to a 10% early withdrawal penalty tax. Altogether cases, investment income is going to be tax-deferred. The IRS limits tax-deductibility of Traditional IRA contributions supported income limits if you or your spouse are covered by an employer plan. For that reason, contributions to a standard IRA aren’t always tax-deductible.
Roth IRAsRoth IRAs are similar to traditional IRAs as far as contribution amounts and tax deferral of investment earnings. The main differences between the two plans are as follows:
- Your contributions to the plan aren't tax-deductible.
- You can withdraw your contributions at any time without being subject to either tax or the 10% early withdrawal penalty.
- Once you reach age 59 ½, and as long as you’ve been within the plan for at least five years, withdrawals are often taken tax-free.
- If you are doing make withdrawals before turning 59 ½, your accumulated investment earnings are going to be subject to both ordinary income tax and the 10% early withdrawal penalty. But once more, your contributions won't be subject to tax or the penalty.
- Simply put, a Roth IRA is a superb way to add tax-free income to your retirement plans.
SIMPLE and SEP IRAsSIMPLE and SEP IRAs are IRAs, with the most differences being higher contribution amounts and a requirement to be self-employed. With an easy IRA, you can contribute up to $13,000 per annum, or $16,000 if you’re 50 or older, and there's a provision for an employer match. For a SEP IRA, you'll contribute 25% of your income, up to a maximum of $56,000. (NOTE: thanks to a complex calculation method, the effective contribution rate for a SEP IRA is 20%.) Much like traditional and Roth IRAs, SIMPLE and SEP IRAs also are self-directed. You'll choose the investment broker where you hold your account and also as manage the investments in the account. You'll open a SIMPLE or SEP-IRA for your employees as a business owner. However, since they're IRAs, each employee will maintain a separate account. This is often unlike 401(k) plans and other employer-sponsored retirement plans; there’s one plan that all employees participate in.
Best Brokers to carry Your Investment AccountOnce you opt for what type of investment account you want to open, the subsequent step will be to choose the broker to hold the account. Fortunately, there are several. You'll choose the one that best matches your investment experience and temperament. Here are the four basic types:
- Full-Service Brokers
- Discount Brokers
- Robo-Advisors – Automated Online Investment Platforms