Interested in investing but unsure of which investment account to begin with? Almost every investor can find an account type that suits their needs, from highly flexible brokerage accounts to tax-advantaged retirement plans to invest for your children’s futures. And you are not required to choose just one investment account. The key is to select accounts that are suitable for your financial objectives.
One thing to remember is that investment accounts are not the same as bank savings accounts. The assets in any investment account have the potential to grow significantly over time, but investing always entails risk, including the risk of losing money. This article will guide you to the various types of investment accounts and will assist you in determining which one is best for you based on your savings goals, eligibility, and other factors. Continue reading!
What Is An Investment Account?
Investment accounts hold stocks, bonds, funds, and other securities in addition to cash. The value of assets in an investment account fluctuates and can, in fact, decline. Investments, in exchange for this risk of loss, typically offer the potential for greater reward, particularly over the long term.
As a result, assets in an investment account are frequently used to meet long-term financial objectives, such as saving for retirement or college. Indeed, it is not uncommon to have multiple investment accounts, each of which is used to help meet a specific financial goal.
Benefits Of Choosing The Best Investment Account For You
With so many different types of investment accounts to choose from, it can be difficult to know which one is right for you. They all have varying degrees of flexibility, potential tax benefits, and limitations. So it all comes down to matching your objectives with the type of investment account that best supports them.
The good news is that you do not have to limit your investment options. It’s not uncommon for people to have one or more retirement accounts to take advantage of tax breaks, a brokerage account to grow money faster than inflation, and a college savings account. Investing can be a way to build wealth for the future, no matter what your goals are; with all of the different types of investment accounts available, you can find the best approach for the future you want to build.
What To Consider When Choosing An Investment Account?
There is no such thing as a one-size-fits-all investment account that is the “best” option for every investor. We all have different financial objectives. So selecting an investment account boils down to deciding where you want to invest, which you can do with the help of a financial planner.
However, there are some characteristics to look for in investment accounts:
Fees reduce your investment returns, so look for an account with no or minimal fees. Savings accounts, in particular, should be free of fees, given that the interest rate on your money is likely to be low. It’s worth keeping an eye out for monthly accounting-keeping fees on a transaction account, say, for an SMSF; not all accounts charge them, so it’s a cost that can often be avoided.
Unlisted managed funds and ETFs may also be subject to fees. You will be required to pay these fees regardless of the return on your investment. This emphasizes the importance of carefully reviewing the fees you will pay and comparing the costs of various funds.
High returns come with higher risks, according to one of the golden rules of investing. So, while a specific type of investment account may have the potential to earn high returns, there is also a higher risk that you will lose money if the value of your investment falls.
Spreading your money across multiple investment accounts can help to smooth out returns and reduce risk. You could, for example, decide to keep some funds in a term deposit while also investing in stocks and ETFs. Because of this diversification, your money will not bear the full brunt of a decline in any one investment market. You should also keep in mind that past performance is not a reliable predictor of future performance.
The ease with which funds in an investment account can be accessed is referred to as ‘liquidity.’ It’s something to keep in mind because unexpected bills or expenses can arise, and you may need cash quickly. Savings accounts are usually very liquid because your money is always available. However, if you need to withdraw some or all of the funds before the fixed term expires, you will almost certainly be charged a penalty.
You may be able to cash in some of your shares in as little as 24 hours if you have a share trading account. Shares, on the other hand, are typically regarded as a long-term investment, and selling during a market downturn because you require extra cash can result in a capital loss on your investment.
Is It A Good Idea To Open An Investment Account?
The benefit of an investment account is that it frequently pays a return on your investment. This is passive income, which means you don’t have to work for it, and the extra money you make can be reinvested, used to achieve personal goals, or paid down debt.
According to an ASX Investor Study, you can join the 9 million Australians who have investments outside of their home and superannuation by opening an investment account. Even better, you can maximize the benefits of compounding returns by reinvesting the returns on your investment account, whether they are dividends on shares, interest on savings accounts, or distributions from managed funds or ETFs.
What Are The Types Of Investment Accounts?
There are numerous types of investment accounts into which you can deposit your funds. Tax-free, tax-advantaged, tax-deferred, traditional — with so many options, deciding where to invest your money can be overwhelming. Here are 5 investment accounts that everyone should have.
1. 401(k) or Other Similar Retirement Account
The 401(k) plan is the first investment account we’ll discuss. Most employees have access to a 401(k) plan offered by their employer. Some businesses do not provide these plans, whereas some public-sector employees use a 403(b) plan and self-employed people can use a SEP IRA. All of these plans operate in the same way: the money you put in does not count as taxable income, and you pay taxes when you withdraw it.
The true power of a 401(k) plan is that many employers will match your contributions. Companies will sometimes match 100% of your contributions up to a certain level, while other times they will match a portion of your contributions. If your employer offers a 401(k) match, you should contribute to your 401(k), at least until you receive all of the free money from your employer.
2. Individual Retirement Accounts (IRA)
An Individual Retirement Account, or IRA for short, is another type of investment account that can help you save for retirement. There are two types of IRAs: a Roth IRA and what is commonly known as a Traditional IRA. Both of these types of accounts can help you save for retirement, but they work in slightly different ways.
A traditional IRA functions similarly to a 401(k) (k). Any money you contribute does not usually count towards your taxable income, but you will have to pay tax on the contributions and earnings when you withdraw them. In a Roth IRA, you pay taxes on any contributions you make this year. When you retire and withdraw from your account, however, you are not required to pay taxes on any contributions or earnings. This makes it an excellent investment strategy for young people or those in a low tax bracket. Income and contribution limits apply to both traditional and Roth IRAs.
3. 529 College Savings Plan
A 529 College Savings Plan is a way to save for college and other higher education costs. Individual states typically offer 529 plans as a way to save for future education costs. You are not required to contribute to the state’s 529 plan, but there are often state tax benefits if you do. Contributing to a 529 plan is similar to contributing to a Roth IRA in that you contribute after-tax dollars. The principal and any earnings can then be withdrawn tax-free if used for qualified educational expenses.
4. Health Savings Account
A Health Savings Account (HSA) is a tax-free account that allows you to pay for qualified medical expenses. An HSA provides three distinct tax advantages:
- Contributions are tax-deductible.
- Your money can be withdrawn tax-free (when used for medical expenses)
- Your earnings will increase tax-free.
You must be enrolled in an HSA and in an eligible high-deductible medical insurance plan to contribute to and invest in an HSA, but the benefits of contributing to and investing in an HSA are difficult to ignore. If you can pay for your current medical expenses, it may make sense to do so while allowing the money in your HSA to grow tax-free.
5. Standard Brokerage Account
A standard brokerage account is the final type of investment account we’ll discuss. A standard investment account has no tax advantages — you don’t get a tax break on any money you contribute, and you pay tax on any earnings when you sell.
You should prioritize any tax-advantaged investments, but if you reach any income or contribution limits, a standard brokerage account can make a lot of sense. This increases the likelihood of your investments keeping up with inflation.
Diversifying Your Types Of Investment Accounts
When you first begin investing, you will most likely begin with safer investments such as a 401k, IRA, or taxable brokerage account. These are the most common types of investment accounts because they are simple to understand and use. If your employer matches your 401k contributions, it’s highly recommended that you take advantage of the free money for your retirement.
Once you have started contributing to the main types of investment accounts regularly, you might want to consider diversifying your accounts. The primary benefit of investing in various account types is that you can take advantage of all of the government’s tax breaks, including free money from your employer-sponsored 401k, tax-free money for your children, and tax-free money for your retirement.
Having multiple accounts is also a good way to ensure that you always have money in case of an emergency: you won’t want to withdraw from your 401k because of the penalty, so having a taxable brokerage account where you can withdraw at any time without penalty is always a good idea.
Finally, having multiple types of investment accounts ensures that you will always have money invested somewhere if one of your accounts fails. Diversification helps to reduce risk and overexposure while also providing peace of mind.
Where Should Your Investment Account Be Opened?
You can look into micro-investing apps, which can be a great way to get started with investing a small amount of money. From there, you can begin to diversify your wealth and expand your investments. However, the type of investment accounts you require will be determined by your goals, interests, and the amount of money you are willing to risk (because there are always risks associated with investing!). You can also speak with a financial advisor or your CPA about how to maximize your money while lowering your tax burden.
Frequently Asked Questions
What types of investment accounts should I maintain?
What is the most secure investment account?
Is it a good idea to open an investment account?
Is a savings account the same as an investment account?
Investment accounts can help you achieve your long-term financial goals. However, they are not all the same. Choosing the right investment account – or a combination of multiple account types – could mean meeting your goal sooner or having more funds to work with.
However, selecting the incorrect account type may result in your money not being available when you need it. Knowing what you want to achieve is the first step in selecting the best investment account. In general, you will end up with one of the five basic types of investment accounts mentioned above.