What Are the Types of Investment Accounts Available

There are several types of investment accounts available, each with its own unique features and benefits. A brokerage account is a type of investment account that allows you to buy and sell stocks, bonds, and other securities.

A traditional IRA, or Individual Retirement Account, is a type of investment account that helps you save for retirement, and contributions may be tax-deductible.

A Roth IRA, on the other hand, is a type of investment account that allows you to contribute after-tax dollars, and then the money grows tax-free.

A custodial account is a type of investment account that allows minors to invest and manage their money, often used for education expenses.

Choosing the right ownership type for your brokerage account can be a bit overwhelming, but let's break it down. You can choose between an individual or joint brokerage account.

An individual brokerage account is a great option if you're managing your investments on your own. You can make decisions and take control of your investments without needing to consult anyone else.

Joint brokerage accounts are beneficial if you're looking to pool your investments with another person. This can be a way to simplify investment management and/or estate planning.

Retirement accounts offer tax-deferred savings and are designed to help investors save for retirement.

You can contribute pre-tax money to these accounts and any gains earned are not taxed until withdrawals are made in retirement.

The most common types of retirement accounts are traditional IRAs and Roth IRAs. Traditional IRAs offer an upfront tax break in the year you make contributions, while Roth IRAs provide a back-end tax break that makes your withdrawals in retirement tax-free.

To be eligible for an IRA contribution, you must have earned income or a spouse with qualified earned income. There are also income limits for contributing to a Roth IRA and for deducting contributions to a traditional IRA.

The maximum individual contribution to an IRA is $7,000 in 2024 and 2025, or $8,000 if you're 50 or older.

There may be taxes and penalties for dipping into IRAs before age 59 ½, so it's essential to consider your options carefully.

A standard brokerage account offers flexibility as market conditions change, allowing for penalty- and restriction-free withdrawals and no contribution limits.

You can easily deposit money and buy and sell investments through a brokerage with a standard account. With this type of account, you'll have more freedom to adjust your investments as needed.

Brokerage accounts may differ in order execution speed, the scope of tradable assets, the depth of analytical tools, and the extent to which investors can trade on margin.

An individual brokerage account has the name of one, and only one, account owner attached.

You can have only one account owner in an individual brokerage account, which means you get to keep complete control over the investments and decisions made within it.

This type of account is great for people who want to manage their investments independently, without any shared responsibilities or liabilities.

An individual brokerage account can be a good option for those who are just starting to invest or who prefer to handle their finances on their own.

Joint accounts are a type of investment account that allows two or more people to pool their funds and invest together. They can be held by spouses, family members, or business partners.

Joint accounts can be cash or margin accounts, and each investor will have access to the account and be able to make trades. Joint accounts are most commonly held by spouses, but are also opened between family members or business partners.

There are three types of joint brokerage accounts: Joint Tenants with Rights of Survivorship, Tenants in Common, and Community Property. Joint Tenants with Rights of Survivorship gives both owners equal rights to the account, and if one owner dies, the survivor will automatically receive the decedent's share of the account.

If one owner dies in a Tenants in Common account, there is no right of survivorship, and the decedent's share of the account will go to their estate. Community Property accounts are only available in certain states and are owned only by a married couple, with assets split 50/50 between each spouse.

Here are the three types of joint brokerage accounts:

A custodial account is a type of investment account set up for a minor with money gifted to the child. This account is maintained by an adult, known as the custodian, who has control over the account until the child reaches the age of majority, which varies by state, typically between 18 and 21.

You can open a custodial account through a brokerage firm, and the type of account you can open depends on your state's laws. Some states allow Uniform Gift to Minors Act (UGMA) accounts, while others allow Uniform Transfers to Minors Act (UTMA) accounts, which can hold real estate in addition to stocks, bonds, and other investments.

The assets in a custodial account can be used for any purpose, not just college tuition. This is in contrast to education accounts, which have specific rules about how the money can be used.

A child can contribute to a custodial IRA if they have earned income, such as from babysitting or an informal business. The account can be set up and maintained by an adult, who transfers it to the child when they turn 18 or 21.

In a Roth IRA, contributions can be pulled out at any time without incurring income taxes or an early withdrawal penalty.

A traditional IRA is a great option for saving for retirement, and here's why: it allows you to contribute up to the annual IRA contribution limit, which can potentially grow tax-deferred until you withdraw it in retirement.

You can also deduct all or part of your contributions from your federal taxes if you're within the IRS income limits, which is a big tax savings today.

To be eligible to contribute to a traditional IRA, you just need to have earned income, and you can contribute to it as well as your 401(k) or another workplace plan, but IRA contributions may not be tax-deductible.

Here are some key benefits of a traditional IRA:

However, there are also some drawbacks to consider:

A margin account allows you to borrow additional funds from your broker to purchase securities, increasing the risk of losses if the market turns sharply against you.

You can borrow money from a broker to purchase securities with a margin account, but this leverage also increases the risk of losses.

To maintain a margin account, you must maintain a minimum balance, pay interest on any money borrowed, and adhere to the Pattern Day Trader (PDT) Rule.

Some brokers may demand an immediate deposit of additional funds from an investor to avoid a margin call, a situation where the value of an account drops below a specific margin requirement level.

If you can't meet a margin call, your broker may sell any securities in your account to meet the call, resulting in potential losses.

Brokerages charge maintenance interest on loans in a margin account.

You can't sell short or buy on margin with a cash account, which is the most basic type of brokerage account.

A margin account is not suitable for new investors, as it involves greater risks compared to a cash account.

Here are the key differences between cash and margin accounts:

Robo-advisors are platforms where automated algorithms make investment decisions on behalf of clients without human participation. They usually restrict investments to pre-defined strategies and specific instruments like mutual funds or ETFs.

These platforms charge a flat monthly or annual fee, or an annual commission of around 0.25% to 0.50% of assets under management. This fee is relatively low compared to traditional investment management fees.

The minimum required to open a robo-advisor account can range from $0 to $500 to over $5,000. This means that anyone can start investing with a small amount of money.

Robo-advisors offer a viable alternative for people new to investing and experienced investors who prefer a hands-off approach to portfolio management. This approach can be especially helpful for those who don't have the time or knowledge to manage their investments manually.

Discount brokerage firms, such as Schwab, Fidelity, and E*Trade, charge significantly lower fees than their full-service counterparts.

For cost-conscious investors, discount brokerage firms are best suited for a do-it-yourself investment approach.

Some discount brokers may charge fees for non-U.S. or thinly traded stocks, but this varies from broker to broker.

You can open a regular taxable brokerage account with a minimum deposit as low as $0 at most discount brokers.

Most brokers charge no commission to buy or sell most stocks, options, or ETFs, but some may charge for trading more complex instruments.

Discount brokers often offer a wide variety of no-fee mutual funds, making them a great option for investors looking to save on fees.

Many discount brokers, including Schwab, Fidelity, and E*TRADE, offer commission-free trading on a wide range of securities.

Education savings accounts are a great way to set aside money for your child's education expenses. You can open a 529 savings plan, which is a popular type of account used to pay for education expenses.

Most states offer their own 529 plans that you can open directly, but you can also open a 529 account through a brokerage like Wealthfront. These plans let you save and invest money to pay for college tuition, books, and other educational expenses.

Some other education savings options include the Coverdell Education Savings Account, which must be set up before the beneficiary is 18 years old. Contributions to 529s and ESAs are not tax-deductible, but qualified distributions are tax-free.

Here are some key benefits of 529 plans:

However, be aware that nonqualified withdrawals are subject to federal and state income taxes plus a 10% penalty.

If you're looking to save and invest for a child's future needs, a UGMA/UTMA account could be a good option. These custodial accounts allow adults to transfer assets to minors while still controlling the investing decisions until the child reaches the age of majority.

There's no contribution limit to UGMA/UTMA accounts, but big contributors should be aware of the gift tax. As of 2024, you can contribute up to $18,000 each year ($36,000 for married couples who elect to gift-split) without paying a gift tax.

You can transfer more than just cash to a UGMA/UTMA account, including stocks, bonds, mutual funds, and other securities. This gives you the flexibility to contribute a variety of assets to the account.

Once assets are transferred to a UGMA/UTMA account, the money belongs to the child and must be used for their benefit. This is an irrevocable gift, so be sure to consider the tax implications and the impact on financial aid eligibility.

Here are some key facts to keep in mind when considering a UGMA/UTMA account:

Remember to consult a tax advisor to understand the tax implications of a UGMA/UTMA account, and consider the impact on financial aid eligibility when applying for college.

A 529 plan is a flexible and tax-advantaged investment plan designed to help you save and invest for future education expenses. These plans have only one beneficiary, but you can change the beneficiary at any time to an eligible family member.

You can use the funds in a 529 plan to pay for more than just tuition; they also can go toward room and board, books, and even certain technology expenses. Funds can even be used to pay up to $10,000 for student loan expenses.

There are two types of 529 plans: prepaid tuition plans and savings plans. Prepaid tuition plans let you lock in the in-state public tuition at the institution that runs the plan, while savings plans allow you to invest your money and potentially earn a higher return.

Some brokerages, like Wealthfront, offer 529 accounts that you can open directly. For example, Wealthfront offers 529 accounts through Nevada.

Other education savings options include the Coverdell Education Savings Account (ESA). An ESA must be set up before the beneficiary is 18, and the money can be used for college, elementary and secondary education expenses.

Here are some key features of 529 plans:

Online brokerage accounts are a great option for investors who like to take charge of their investments and make their own trades through a website or mobile app. Many online brokers offer research and analysis tools to help with informed decisions.

Robinhood Markets Inc. pioneered no-fee stock, ETF, and options trading back in 2013. This led to most online brokers following suit and offering zero-commission trading.

As of 2024, established and new brokers alike offer zero-commission stock, ETFs, and options trading. This includes popular options like Charles Schwab, Fidelity, E*Trade, Vanguard, and Interactive Brokers (IBKR).

If you're interested in investing in real estate, you'll want to consider a Self-Directed IRA, which allows you to hold alternative assets like property and cryptocurrencies.

A Custodial IRA, on the other hand, is designed for minors and allows adults to manage investment accounts for them.

For investors with a focus on education expenses, a 529 College Savings Plan can be a great option, with tax benefits and flexibility to change beneficiaries.

ABLE accounts are a type of specialized account designed for people with disabilities.

These accounts are similar to 529 accounts, but offer additional benefits and protections.

To be eligible for an ABLE account, an individual must have a disability that meets a specific definition and receive a letter of certification from a physician.

The onset age of eligibility for ABLE accounts is set to rise to 46 starting January 1, 2026.

For account holders, the first $100,000 saved is exempt from the $2,000 SSI individual resource limit.

Medicaid benefits are also protected, even if savings exceed $100,000.

ABLE account program details vary by state, so it's essential to check the details of your own state via the ABLE National Resource Center's state search tool.

An HSA (health savings account) is a tax-advantaged savings account designed to help you save for eligible medical expenses. To contribute to an HSA, you must have an HSA-eligible health plan, which falls under the category of high-deductible health plans (HDHPs).

HSAs offer triple tax benefits: contributions are tax-deductible, withdrawals for qualified medical expenses are tax-free, and any investment growth is tax-free if used for qualified medical expenses. This can be a great way to grow your medical savings for the future.

After age 65, money in your HSA can be withdrawn and used for non-medical expenses, penalty-free, but you will have to pay income tax on those withdrawals. This flexibility can be a big advantage for those who are planning for retirement.

HSAs are completely portable, so even if you change jobs or health care plans, you keep the account and the money you saved. You also have the option to transfer it into a new employer-sponsored HSA at your next job.

To be eligible to contribute to an HSA, you must have an HSA-eligible HDHP, which may not be suitable for everyone, especially those with high health care needs, or they may not be offered by your employer.

The annual contribution limit for HSAs caps the amount you can contribute to the account each year. It's essential to keep track of this limit to ensure you don't exceed it.

Before age 65, money in your HSA must be used for qualified medical expenses or you'll be on the hook for both income taxes and penalties on withdrawals.