Types of Investment Accounts

Joseph Meyer
Written by
Last update:

Quick Guide To The Types of Investment Accounts:

(IRA, 401k, Roth IRA, Traditional IRA)

When you save and invest money for your retirement, you may end up with more than one account. It’s common to have both a traditional retirement account and a Roth IRA, or to have a traditional and a Roth 401k. And as you’ll see in a minute, there are plenty of other accounts beyond those. What’s more, if you already have a retirement account, adding a second often makes sense! Here’s a quick guide to the most common types of investment accounts.

The Different Types of Investment Accounts You Can Open and Why

Many of us are often confused by how many investment accounts you should open in order to make the most of your money. There are investment accounts that you already know about such as bank savings accounts, money market accounts, CDs, and cash accounts, and you may even have investments in stock and bonds.

However, there is something else you need to know … which are brokerage accounts. Brokerage accounts are in effect investment accounts, but they differ from the ones mentioned above in a couple of ways.

First, brokerage accounts are meant for the long-term of investment. These are investment accounts meant to hold stocks, bonds, and other assets for the long-term.

Secondly, unlike the bank accounts mentioned above, brokerage accounts do not have any federal insurance and the protection of the Federal Deposit Insurance Corporation. However, this does not mean that you will lose your money. The brokerages invest money into low-risk, high-value stocks and bonds to avoid the risk of losing significant amounts of money.

Another difference between these accounts and the bank accounts and money market accounts is that you do not have to keep as much in there as you do in the other accounts. You can keep just a small amount of money in there and trade frequently.

Taxable Brokerage Accounts

Another type of investment account is the taxable brokerage account. This is a type of brokerage account that is designed to help investors manage their investments without having to worry about complex tax issues. A taxable brokerage account is used for holding all the investments that are needed by the individual investor or their businesses.

A taxable brokerage account allows for the individual or the business to trade out one security for another investment whenever they want and have no tax issues or complaints about the investment switching.

They can also hold the investments in the account until the business is ready to sell them to raise cash. The account holder will not have to pay taxes on the money that the account earns in the account.

Employer Sponsored Retirement Plans

If your employer offers the option to get invested in their retirement plan, you should definitely seize the opportunity. These plans are called 401Ks, 403Bs, or other similar acronyms. These are usually the best type of plans because your money is invested in the stock market where it should earn you higher interest.

Not every employer offers these types of plans. If you’re not eligible for an employer sponsored retirement plan, don’t dismay. In fact, you can put part of your money in 401Ks, part in Roth IRAs, and part in brokerage accounts.

Traditional and Roth IRAs

There are three primary types of retirement account: Traditional IRAs, Roth IRAs, and 401k-type accounts (403b, 457, etc). Traditional IRAs are funded with pre-tax dollars, and thus the money grows tax-free. One of the biggest benefits of a traditional IRA is that you can deduct the contributions you make to the account from your taxable income, meaning that your money will have a bigger impact on your monthly budget while you save. You can open a traditional IRA at any brokerage or bank that offers IRAs.

Roth IRAs are funded with after-tax dollars, so your money will be taxed when you withdraw it. However, the money doesn’t have to be paid back (unlike a loan) and so your money is completely yours and not subject to estate taxes at your death. The big drawback of a Roth IRA is that you can’t deduct your contributions from your taxable income, so it can be quite a bit less tax-efficient than a traditional IRA. Of course, you’ll be able to withdraw the funds tax-free at retirement.

SIMPLE and SEP IRAs

SIMPLE stands for Savings Incentive Match Plan for Employees. A SIMPLE IRA is a personal IRA wrapper with several features of a qualified retirement plan. It offers employee and employer contribution opportunities and the ability to roll the money over to another employer's SIMPLE plan.

A SIMPLE IRA is a traditional IRA that must be set up by an employer and sponsored by the employer. The employer can contribute to the SIMPLE in two ways – match (50% or a specified amount) or nonelective (2% of each employee's compensation up to a specified annual limit).

SIMPLE IRAs must be set up before October 1st of the current year; and participants' vested contributions and any employer contributions must remain in place from year to year. Employees who are active in the plan may make rollover contributions to the same SIMPLE IRA plan each year.

Best Brokers to Hold Your Investment Account

Investment accounts allow you to invest in the stock market without having to actually purchase individual stocks(unless you want to). There are many different types investment accounts. Each account has different requirements and benefits, and the type of account that is right for you will depend on your unique situation. Three of the most common investment accounts are 401(k), Individual Retirement Arrangement (IRA), and brokerage accounts.

When choosing an investment account, there are certain benefits that you should keep in mind. One of these is the level of bankroll protection. In the same way that you wouldn’t want to put investment capital in a financial institution that is too close to bankruptcy because they may not be able to pay back what you are owed, you also will want to avoid keeping your money in a brokerage account that is too close to the edge.

Utilizing a large asset protection firm can help keep your investment capital safe even in the worst case scenario.

Another benefit that you will want to consider when choosing a financial institution is the level of convenience that they offer. If you are small investor and want to trade in moderate quantities you may not want to have to deal with getting your money from one financial institution to another. Additionally, you may need convenience features like instant access and detailed reports.

Robo-Advisors – Automated Online Investment Platforms

Robo-advisors are an electronic platform that provides financial advisory through various asset allocation models such as “robo turbo”. Robo-advisors come in the form of software tools that can be accessed online and have replaced portfolio managers in many cases.

Robo-advisors use your provided information, such as your current income, savings, and risk tolerance, to create an investment plan. This investment plan follows an established investment strategy that aims to balance your risk and reward and choose mutual funds, ETFs, and other investment products based on your provided information. The purpose of the investment plan is to maximize your retirement savings and wealth.

With more advanced robo-advisors, users also have the ability to create, modify, and update their investment strategies. You can also create and adjust financial goals to track progress toward your targets such as retirement, home buying, and college savings. Robo-advisors monitor your progress to help you create and adjust financial goals to track progress toward your targets such as retirement, home buying, and college savings. Some robos offer mobile app capabilities so that you can monitor your investment portfolio on-the-go.

Micro-Investing App for Beginning Investors

Investing app for children is a very exciting way to introduce your kids to the stock market. However, it can also be a very risky thing to do with younger kids.

Before we go into the details of how you can use apps to teach your kids about investing, I wanted to bring up a few basic guidelines that you can follow.

Keep it simple. Just like we said earlier with regards to rules when it comes to teaching capitalization, you should stick to the basic concepts for your kids and keep the complicated stuff for more mature investors. When dealing with a younger crowd, simplicity really is the key to successful education.

Talk about what you’re doing. Explain the importance of your purchases and why you’re making them. Even if they don’t always have an understanding, the fact that you’re talking about it with them will lay the foundation for future financial success.

Monitor closely. While micro investing apps are a really cool way to get kids excited about investing, you need to make sure you keep a close eye on their accounts. Younger kids have a tendency to spend money on things they don’t really need, and, if they are investing, those losses are real to them. That’s why steps like setting spending limits are particularly important when it comes to helping your kid invest.

Full-Service Brokers – For Long-Term Investors

If you have a long-term horizon, and you are investing in stocks with a well-diversified portfolio, I recommend you open an Individual Retirement Account (IRA) at a full-service broker. While you may end up paying higher commissions and other fees, you won’t have to worry about being taken care of by a financial advisor or being limited to a predetermined set of mutual funds.

You can also use full service brokers to invest in more complex investments such as options, commodities, and real estate. Full service brokers also allow you to trade stocks on margin, which, when used prudently, can be a good way to earn additional return when the market is running higher. That can be especially helpful if you’re in a position to lock in high investment gains.

The downside, of course, is the higher cost. Full-service brokers don’t come cheap. In fact, the cost for opening an account is high, and the commission and other fees add up over time.

Open an IRA at a full service broker.

Discount Brokers – For High Frequency Traders

The discount broker serves as the middle man between you and the stock exchange. Their business operates on the principle of a retail broker so you can buy stocks and sell stocks online. You do not need a fancy account for this since if you’re just getting started with your investment career, you can avoid the burdensome paperwork and complicated setup procedures. The discount broker typically requires a small account minimum, which means you won’t need a substantial amount of cash to start trading.

Discount brokers offer flat trade rates, which means they charge a small amount of money for each trade and make up for it by attracting a larger number of smaller accounts. Don’t be surprised if you get charged a small fee on top of the stock’s initial price because you’re simply paying for the service. If you’re more interested in investing, you should buy and hold the stocks you like rather than try to trade with the market.

Which Investment Account Type Is Right For You?

There are two general types of investment accounts: tax-deferred accounts and tax-exempt accounts.

Tax-deferred accounts are contributions that are tax deductible. But any earnings are not taxed until they are distributed. This includes:

Retirement accounts: This includes IRAs, 401k, 403b accounts and pensions.

529 account: This is a state sponsored tax-deferred savings plan that has tax benefits in most states, including the option to deduct your contribution from your income for state tax purposes. A 529 plan can only be used to save money for elementary, secondary and higher education.

Health Savings Account (HSA): This is a retirement account specifically designed to help you save money for medical expenses. The contributions are tax deductible, and regular contributions can be invested just like 401k or IRA plans.

An IRA: Individual Retirement Account is a personal savings plan that offers tax benefits and allows you to save for retirement. You can make contributions to a traditional or Roth IRA to lower your taxable income and pay lower taxes now. There is an IRS limit on the IRA contribution that is adjusted each year.

Non-tax-deferred accounts: Non-tax-deferred accounts are not tax deductible, but the earnings on non-tax-deferred accounts are not taxed until they are distributed. This includes: