What is an Investment Account?
Investment accounts are some of the most common ways to futureproof finances. An investment account is a broad term that refers to any type of account that holds investments like bonds, stocks, exchange-traded funds (ETFs), cryptocurrency, or cash intended for achieving long-term growth, or even income and capital preservation. Depending on what kind of investments you’re interested in, you don’t need significant savings or extra cash to open an investment account. As little as $100 is more than enough to dip your toes into these waters. However, if you’re interested in more serious investing and trading and don’t have enough cash lying around, you could set up an account with a broker and become a funded trader.
Different types of investment accounts
Considering that there are so many different investment options, it’s no surprise that there are countless types of investment accounts you could set up. The following are some of the most common ones, ideal for both beginners and experienced investors alike.
If you’re interested in buying and selling securities (including stocks, bonds, and ETFs), you need to set up a brokerage account. It works similarly to regular bank accounts, allowing you to make deposits and withdrawals, transfer money, and more. However, unlike traditional bank accounts, a brokerage account will give you access to the stock market. Brokerage accounts are taxable since any income you receive from them is categorized as a capital gain. Additionally, depending on the broker, you might encounter an array of rates and fees. There could also be withdrawal rules and limits you’ll need to follow.
The 401k is the most common investment account. It’s a retirement savings plan for employees that enables you to contribute a part of your earnings towards this account. As a general rule of thumb, the employer decides through which financial institution to set up the account, and they get to choose the available asset options. The employee chooses the amount of money that goes towards this plan. There are several subtypes of the 401k, including employer-sponsored and solo 401k. Similar to this investment account are a) the 403B (for employees working in public schools or non-profits) and b) the 457 (for civil servants and government employees).
Somewhat similar to the 401k, an individual retirement account (IRA) is a personal savings account that allows you to choose from an array of financial products – stocks, bonds, ETFs, mutual funds, and more. Some IRAs even allow investments in commodities and real estate. Whether you open your traditional IRA at a bank or an IRS-approved brokerage firm, the account is tax-deductible. There is a limit, however, to the amount you can contribute to the account annually. In most instances, the limit is $6,000/year, and for those aged 50 or older, it’s $7,000/year. Since the IRA is designed as a retirement savings plan, you could incur fees for early withdrawals, usually around 10%.
Finally, the 529 account is one of the most common investment plans. Regarded as an education account, it’s designed for individuals saving for the higher education of their children or other beneficiaries. Although not tax-deductible, the 529 is a tax-advantaged account – you will only be taxed on the investments going into the account. Still, some states will offer a tax deduction on contributions to the 529, and some will even match your contributions.