Three of the Most Common Investment Account Types

Whether you are looking to save for retirement, a child’s education or another goal, there is likely an investment account type available for you.

Below, we give a brief definition of three common account types, as well as information on some of the options that fall under each one.

1. General investing accounts

A general investing account offers access to a wide range of potential investment choices, including stocks and bonds. Keep in mind, these accounts are taxable, so any interest or dividends you earn on investments, as well as any gains on investments after you sell, are subject to taxes.

2. Retirement accounts

Unlike a general investing account, a retirement account gives participants the flexibility to make contributions either pre-tax or post-tax, depending on what type of account they choose. In addition, there are distinct differences between the two main types of retirement accounts: individual retirement accounts (IRAs) and employer-sponsored plans.

IRAs (Traditional & Roth)

An IRA is like a general investing account in that it also allows investments in a wide range of asset classes, including stocks and bonds. However, potential tax benefits distinguish one type of IRA from another.

For example, with a traditional IRA you get a tax break in the year you make contributions to the account. In contrast, one of the unique benefits of a Roth IRA is that any withdrawals you make when you are 59½ or older are tax free as long as you’ve held the account for at least five years.

Employer-Sponsored Retirement Plans

401(k)s are retirement accounts that allow employees to contribute pre-tax salary to plans set up by their employers, who often contribute a matching amount based on a predetermined formula. Many employers also offer Roth 401(k)s, which have the same features as a 401(k), only contributions are taxed before they go into the account.

If your employer does match your contributions, say 50 cents for every dollar you contribute, many financial professionals recommend adding to a 401(k) before an IRA. 401(k)s also have higher contribution limits than IRAs.

That said, your investment options tend to be more limited with 401(k) plans than IRAs. With 401(k)s, employers pick the investment options—typically a wide range of fixed income, equity and money market mutual funds.

3. Education savings accounts

If you are looking to save for a child’s education, 529 Savings Plans and Coverdell Education Savings Accounts (ESAs) tend to be two of the more popular education savings options, partly due to the flexibility to change beneficiaries to another member of the family. For example, if your first child only uses 50% of the amount you saved for them, the remainder could be passed to your next child or a cousin. However, it can only be used for education.

Another option is custodial accounts, such as Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) accounts, to provide funds directly to your child. Although parents often use UGMA or UTMA accounts to save for college, they aren’t technically education savings plans or accounts. In other words, the money doesn’t have to be spent on college; it can be spent on any day-to-day expenses that benefit the child. However, gifts to these accounts are irrevocable, so you can’t pass the money to another child or family member.

Ultimately, your decision on how to save for your child’s education will likely come down to several factors. The factors could include how your child will use the money, your income level, and contribution and tax considerations.

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