Starting an investment account is one of the wisest financial decisions you’ll ever make in your life.
Not only does an investment account allow you to trade in securities actively. It also helps to foster the often-elusive saving culture.
But with many options, honing in on the best investment account for you can seem daunting. That’s especially true if you do not understand what a particular account entails.
Fortunately for you, we’ve prepared a handy guide to everything you need to know about investment accounts, with a particular focus on the different investment account types out there. Read on and be informed.
What Is An Investment Account?
Before we delve deeper into the various types of investment accounts, it would be great to begin easy by understanding what an investment account is.
There are numerous types of accounts that an individual or business can maintain. They range from basic savings accounts to cash management accounts, certificate of deposit accounts, and investment accounts.
The term investment account refers to a current account actively linked to a securities account.
An investment account is used primarily to transfer money in transactions to deposit and security services. The account lets you manage transactions in funds, stocks, bonds, and exchange-traded funds (ETFs).
The threshold for opening an investment account is usually higher than that of opening a traditional account. For instance, it’s easier for companies on the Dax 40 Index list to open an investment account. Also called the Deutscher Aktien Index or the GER 40 Index, the Dax 40 Index is a stock index representing the top 40 largest and most liquid German companies trading on the Frankfurt Exchange.
However, the fact that Dax 40 Index only lists the 40 largest German companies doesn’t mean businesses not featured in its rankings cannot open an investment account. As you shall find, even individual traders can maintain active investment accounts if they meet the requisite threshold.
Most Common Investment Account
A standard brokerage account is unarguably the most common type of investment account. Also known as a taxable brokerage account or non-retirement account, a standard brokerage account allows you to pursue a wide array of investment options, including stocks, bonds, mutual funds, ETFs, etc.
There are two main types of standard brokerage accounts- Individual Taxable Brokerage Account and Joint Taxable Brokerage Account. An individual taxable brokerage account is opened and wholly-owned by one person, while two or more people share the ownership of a joint taxable brokerage account.
Standard brokerage accounts may also be categorized as cash or margin accounts. A cash account is used primarily for buying investments with money deposited directly to your bank account. In contrast, a margin account is suitable for investors seeking to purchase investments using money borrowed from the broker.
Whichever type of standard brokerage account you open, it’s important to note that the account will be subject to taxation. Taxes are typically levied on interests or dividends earned on investments and transactions.
On the pro side, there’s no limit to the amount of money you can contribute to a non-retirement account. Besides, you can withdraw cash at any time.
Other Types of Investment Accounts
A retirement account offers you the same range of investments as a standard brokerage account. The primary difference lies in the tax implications, with most retirement accounts being tax-sheltered.
Retirement accounts come in many types. Common ones include traditional individual retirement accounts (IRAs), Roth IRAs, SIMPLE IRAs, SEP IRAs, and Solo 401 (k)s.
It’s also worth noting that most retirement accounts cap the maximum amount you can contribute. Some may also slap you fees for dipping into the accounts before retirement.
- Education Accounts
Education accounts, as the name implies, are investment accounts that allow you to settle your education expenses.
At first glance, an education account may not seem like an actual investment account. That’s especially when you consider putting money away exclusively for meeting education expenses instead of generating more revenue. But if properly managed, an education account can generate considerable interest.
A notable example of education accounts in the United States is the 529 savings plan. You can open a 529 plan directly in most states. However, you’ll only be able to use the savings in eligible institutions.
Investment Accounts for Kids
Nearly all investment accounts need you to be of legal age before opening them. But a kids’ investment account is a welcome exception to that rule.
A kids’ investment account offers peace of mind, knowing that your little ones will always have something to fall back on when your fortunes begin to dwindle. It can also be an excellent retirement plan if the beneficiaries do not need the money.
As with most investment accounts, a kids’ investment account comes in many types. A common one is a custodial brokerage account that uses money gifted to your children. An adult (known as the custodian) manages the account and then transfers it to their child’s ownership when they attain the legal adult age.
Having an investment account is a proactive way of preparing for the future. These accounts can offer a much-needed safeguard during times of financial austerity. There are numerous types of investment accounts you can manage. Happy investing!