Types of Investment Accounts

Most of us agree that the sooner you start putting money aside for your future, the more opportunities you’ll have for growth. And, investment accounts can help you reach your goals faster. You don’t have to choose just 1 type. You can have 1 or any combination in your financial portfolio. Let’s talk about some different types of investment accounts.

Brokerage Accounts

What are they? A brokerage account is where you hold and trade your investments in mutual and exchange-traded funds, stocks and bonds. 

What do I need to know? The 2 primary types of brokerage accounts are cash accounts and margin accounts. The main difference between the 2 is that with cash accounts, all transactions must be made with funds already available in the account, while margin accounts allow you to borrow money against the value of assets in the account. Brokerage accounts are usually managed by industry professionals. You can get advice and services through licensed stockbrokers. They also can act as your agent in buying or selling. Another option is to find a digital investing service—where you can manage your own portfolio or have technology make your investment decisions.

Retirement Accounts

What are they? As the name implies, retirement accounts allow you to set aside money for retirement. Although you may not have realized it, learn more about retirement accounts are investment accounts, too.

What do I need to know? The most common are traditional IRAs and Roth IRAs. They often have the same types of investments as a standard brokerage account. Both are known as tax-advantaged accounts. The difference is how and when you pay taxes. Many people choose based on whether they think they’ll be in a higher tax bracket now or when they retire. 

• Traditional IRAs: These are tax-deferred accounts. That means you get to deduct what you contribute to a traditional IRA on your tax return each year, but you pay taxes on your withdrawals at retirement. 
• Roth IRAs: You use your after-tax money to make your retirement contributions, so you won’t have to pay taxes on your withdrawals at retirement.
• 401(k)s: These are employer-sponsored retirement accounts funded by pre-tax contributions directly from your paycheck. Many employers contribute to employees' 401(k) accounts and even match employee contributions up to a certain percentage each pay period.
• Thrift Savings Plan (TSP): This is the retirement savings and investment plan for servicemembers and federal government employees. The amount of retirement income you receive from this plan depends on your contributions during your working years, how much your agency contributed and the overall earnings accumulated over time.

Education Accounts

What are they? These acccounts are set up to cover education-related espenses. Parents, grandparents and others who want to put money aside as a hedge against inflation and increasing higher education costs often open an learn more about an education account.

What do I need to know? Some of these accounts are set up specifically for higher education. Others can cover education expenses from kindergarten through college. And, some are tax-advantaged savings accounts. For example, both a Coverdell and a 529 plan are tax-advantaged accounts that allow you to put aside money for tuition, room and board, and supplies. A Coverdell has annual contribution and income limits and a 529 plan does not. 

A financial advisor can explain more about the various options, help you decide how much to save and determine which might work best for you.

ABLE Accounts

What are they? Achieving a Better Life Experience accounts, also known as ABLE accounts, are also tax-advantaged accounts which allow money to be set aside for qualified disability-related expenses. 

What do I need to know? These accounts are intended to build up money for the care of young people with disabilities. Anyone can contribute, and the first  $100,000 won't count as the beneficiary's personal assets for certain federal benefit programs. They work similarly to 529 education accounts. And, according to the IRS, "families may roll over funds from a 529 plan to another family member's ABLE account."   

Trust Accounts

What are they? Trusts are set up for the benefit of someone and managed by a trustee. You may be most familiar with those set up to honor a grantor’s wishes for how assets are distributed after their passing. This is just an example. It’s not the only type of trust. 

A trust investment account invests the grantor's money in various securities on behalf of those who have been named as beneficiaries. These investments are overseen by the person the grantor named as trustee. 

What do I need to know? The trustee has all the decision-making power and will decide which securities to include and when or if some should be sold or new ones added. The terms of the trust will determine how much the trustee can invest and when and how to distribute money to the beneficiaries.  

Custodial Accounts

What are they? Adults who wish to create an account for a minor can open a custodial account. They may be used for education or just as a general gift to be held for the future.

What do I need to know? The donor chooses a custodian to manage how and where the funds are spent or invested. The money can be invested in a variety of assets at a bank, credit union or brokerage house.  They can be easier and less costly than setting up a trust fund. 

Boost What You Know About Investment Accounts

There are a variety of investment accounts you can use to reach your savings goals. Your goals, risk tolerance and available funds will determine your investment strategy. Navy Federal Investment Services can help you with financial planning and investment services.