Various Investment Accounts

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:

  1. Taxable Brokerage Accounts
  2. Employer-Sponsored Retirement Plans
  3. Traditional and Roth IRAs
  4. SIMPLE and SEP IRAs
  5. Best Brokers to carry Your Investment Account

The Different Types of Investment Accounts You Can Open and Why

There 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 Accounts

A 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 Plans

Many 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)
Though each may be a different plan, the overall parameters are the same for each. Your contributions to the plan are tax-deductible, and your employer may offer an identical contribution. Many also include a loan provision. If so, you'll borrow up to 50% of the vested balance in the plan, up to $50,000. You can contribute up to $19,000 per annum, or $25,000 if you’re over 50. With employer matching contributions, total contributions are often as high as $56,000. Both your contributions to the plan and investment income earned are tax-deferred. Tax is going to be due on the withdrawals from the plan once you reach retirement age. If you are doing take distributions before reaching age 59 ½, you’ll even have to pay a 10% early withdrawal penalty tax. With most plans, the investment trustee is going to be chosen by your employer. Some plans offer unlimited investment options. Others, just like the TSP, allow you to settle on only a small number of funds. And although the plans are tied to your employer, they’re generally portable. If you allow one employer, you'll either do a rollover of the plan into an IRA or your next employer’s plan if they allow rollovers.

Traditional and Roth IRAs

Individual 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 IRAs

For 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 IRAs

Roth 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.
There’s another significant difference between a Roth and a traditional IRA, and that’s eligibility. The IRS imposes income limits beyond which you’re not eligible to make a Roth IRA contribution. But whether or not you can’t make a Roth IRA contribution, there's a workaround. It’s called a Roth IRA conversion, and it is often used to convert other retirement plans to a Roth IRA.

SIMPLE and SEP IRAs

SIMPLE 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 Account

Once 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:
  • Robo-Advisors
  • Micro-Investing
  • Full-Service Brokers
  • Discount Brokers
  • Robo-Advisors – Automated Online Investment Platforms
Robo-advisors handle the work of managing your investments for you ultimately, and they do it at a surprisingly low fee. that has created your portfolio and supported your goals, time horizon, and risk tolerance. Your portfolio will include a mixture of stocks and bonds, and a few Robo-advisors will also add real estate and natural resources. They’ll even reinvest dividends earned and rebalance your portfolio as necessary. The investments are typically held in exchange-traded funds (ETFs) instead of individual securities. For example, Betterment provides complete management of your portfolio for an annual fee ranging between 0.25% and 0.40%. And since there’s no minimum initial investment required, it’s an ethical choice even for new investors. Wealthfront works much the same way, but it's a minimum initial investment requirement of $500 and charges a fee of 0.25%. At that rate, you'll have $10,000 professionally managed for just $25 per annum or $100,000 at $250 per annum. Or maybe $1 million managed for just $2,500 per annum.

Micro-Investing App for Beginning Investors

If you’re a replacement investor and having difficulty accumulating the cash you need to begin, there are micro-investing apps. They not only invest your money – Robo-advisor style – but also facilitate you're saving it in the first place. For example, an app referred to as Acorns uses a method of calls “round-ups” to help you save up the money to invest. When you connect the Acorns app to a bank account, it rounds up purchases and saves the difference for savings and, eventually, investing. Let’s say you create a purchase of $6.25. Acorns deduct $7 from your account, pay $6.25 to the merchant, and put $0.75 in savings. The savings portion is transferred to an Acorns Robo-advisor investing account once it reaches $5. There, it'll be managed at a fee of just $1 per month on the first $5,000, then 0.25% on higher balances. Stash is another micro-investing app, but it uses a unique methodology to help you save money. You'll move money from your checking account into your investment account in increments of $5. Stash investing offers different plans, using flat fees as low as $1 per month. Either of those apps will help you to begin saving and investing, accumulating the cash to do it through a large number of very small transactions. They’re a superb option if you’ve been having difficulty accumulating the money to begin investing.

Full-Service Brokers – For Long-Term Investors

If you’re a seasoned investor or looking to become one, the most straightforward choice will be a full-service broker. There you'll trade stocks, bonds, mutual funds, ETFs, options, and other investments, all at low fees. Most now also offer their Robo-advisor options, so you’ll be ready to maintain both managed and self-directed investing on the same platform. Full-service brokers have the distinct advantage of providing everything you need to invest and improve your investing skills. That has educational resources, trading tools, investment tracking, and even simulators to assist you in improving your investment performance. Charles Schwab and Fidelity are the two biggest full-service brokers. Each charges a low $4.95 cost on stocks and ETFs and provides excellent customer support 24 hours a day, seven days a week.

Discount Brokers – for top Frequency Traders

Discount brokers work almost like full-service brokers – some even offer full-service support – but with lower trading fees. They cater primarily to active traders by offering lower commissions. One prominent discount broker is Ally Invest. Unlike Fidelity and Charles Schwab, they charge $0 per trade on stocks, ETFs, and options. As another bonus, you'll receive a FREE signup bonus (up to $3,500) if you meet the terms. Another platform you'll consider for commission-free trades is Robinhood. The limitation that comes with commission-free trades is that Robinhood doesn’t offer the investment suite or customer service that the majority of other brokers do. And therefore, the investments you can trade in are also more limited. However, Robinhood does allow you to trade cryptocurrencies, which is highly unusual within the brokerage industry.

Which Investment Account Type is proper For You?

As you'll see, not only is there an investment account for nearly any purpose. But there are specific sorts of investment brokers for investors at every level. You may start with a micro-investment app to accumulate investment capital, then give way to a Robo-advisor as your portfolio grows. And eventually, you'll decide to begin choosing your investments. That’s when it'll be time to open an account with a full-service brokerage firm. And if you like investing and become a frequent trader, you'll move some money into a discount brokerage account, which will give you the benefit of low- and no-fee commissions. And that’s the purpose – you have more investment choices now than ever before.

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