Investment Accounts

 There are three types of investment accounts that are available to most people: a brokerage account, pre-tax retirement account, and a post-tax retirement account. Today we will go through these and see the pros and cons of each account. Stay tuned to hear about when you should use each account and what the next post will be about.

Before we get too far into the post, one good thing to know is that you can open each of these accounts through most online brokerage platforms, such as Fidelity, TD Ameritrade, or Charles Schwab. You can conduct your own research as to which platform is best for you to use. I personally use Fidelity's brokerage and Roth IRA options, and though this is not sponsored, I highly recommend their platform.

Brokerage Accounts

The first type of investment account, also the most common, is called a brokerage account (sometimes called an individual account) . This is an account that you can deposit and withdraw at will. You are also free to choose whichever form of investing you're interested in, whether it be stocks, bonds, ETF's, etc., assuming you're the sole manager of the account. There are also options to have an investment broker manage the account for you. 

Investment brokers will pick the best investments for you, taking into account the risk level you're comfortable with and the amount of money available. They typically recommend to diversify your portfolio, which is a fancy term that means to have investments of different kinds and sectors, such as energy, materials, or industrials. The catch here is that most advisors will take a percentage of the money made in that account. Typically this is 1-2%. This may not seem like much, but in investments where you only profited 5% at the time of selling, this can be quite a high price. 

I personally prefer to manage my own account and gather my own information on investments from sources on the internet. This can be risky but it does mean you get to keep 100% of your gains. Disclaimer though, there is the ability to lose money in the stock market, for those of you that may be starting out. If you buy a stock at $25 a share, it could go to $30 a share and you make $5, taking into account that you'll have to pay taxes on that profit. The flip side of it is that the stock could also go to $20 a share. Now you have two options: sell and take the loss, or hold it and hope it goes back up to at least $25, maybe more. Another thing you'll want to know if you're trying to get into investing, which you can find in a simple Google search, is the difference between a short-term and long-term investment. This depends on how long you hold an investment for, typically less than or more than a year. Each option has different tax implications so be sure to research accordingly.

Retirement Accounts

The two types of retirement accounts depend on when you contribute to it. You have options to either contribute pre or post-tax dollars. Each of these can be used by people at different stages in their lives. Employers typically offer an option to contribute to a 401k, and you have the option to open your own IRA, whether it be traditional, Roth, or another option given by your brokerage platform. A disclaimer is that if you're planning on transferring money from a pre-tax account to a post-tax account, there will be tax implications within that transfer once tax season hits. Something else to note is that with most retirement accounts, there is a certain minimum age required to take the money out. If you need to take the money out before this age, one of two things happens. The first is if there's no approved life event occurring, there will be a penalty and possible tax implications upon withdrawal. The second is if there's an approved life event that occurred, the money can be taken out penalty-free. Whichever account you choose, be sure to research the minimum age to withdraw, the approved life events to withdraw early with no penalty, and the age where withdrawals are required. When you hit that age, you have the ability to reinvest it into a brokerage account, but there will always be tax implications in those accounts.

401k

A 401k is an option to put a certain percentage of your paycheck in before the income tax is taken, typically offered by employers in lieu of a job-sponsored retirement program which is very seldom used in this day and age. For the duration of you keeping the money in the account, you can gain money through investing your cash tax-deferred. This means though that once you start taking the money out, you'll then have to pay taxes on it. Typically, an employer will allow you to pick your own investments from select options they provide you. These investments are usually managed funds and ETF's, meaning there will be fees taken out due to brokers choosing what's in these funds and ETF's. I have personally owned one of these in the past and the fees aren't astronomical, but there are other options, much like the self-managed brokerage account we talked about earlier, that allow you to choose your own investments with no brokers fees taken out.

IRA's

This is a similar option to the 401k, except you don't need to rely on your employer to offer it. There are different types of IRA's and should you choose to use one, so you'll need to do your own research as to which IRA is right for you. For the purposes of this post we will talk about 2 kinds of IRA's: traditional and Roth. The former option is similar to pre-tax, while the Roth is post-tax.

Traditional IRA

This is an interesting retirement investing option as it essentially simulates a pre-tax account without needing to tie into your payroll. How it works is that you either have money saved or you receive a paycheck after the tax has been taken and deposit it into the account. Keep doing this as much as you can and when tax season comes, you have the ability to get some if not all of the money deducted. A huge benefit to a traditional IRA is that it's owned by you, which means you have full control over which investments you pick, instead of an employer giving you options as to what you can invest in.

Roth IRA

This is the option that I'm using now as it is best for me, and after this I'll go into where I'll say when each account is right for you. This is a post-tax account. What will happen is you either take savings or a paycheck and deposit the money into the account, and you can grow it to your liking. The best part about this account is because you've already paid tax on the money that you invested with, you can take it out tax-free upon retirement. These can be opened by an individual through their brokerage platform. Employers sometimes offer Roth options but typically it's the same story as 401k's, they have approved funds that you're allowed to invest in. 

Honorable Mention

Parents out there, do you have some extra money that you can spare and want your kids to learn about investing? Some brokerage platforms allow for parents to create their children a youth investment account. Typically the kid has no way to deposit or withdraw on their own, but they have complete control over their investments. If you know how, you can teach them how to research investments and pick the right ones. A simple one to teach the kids is investing in blue-chip stocks and index funds. These are usually safer routes for a young, beginning investor. Also, if you feel your kid is prone to being upset about losing money, maybe have them choose the safest stocks or simply don't start the account for them. Regardless, it's something to consider for all the parents out there.

Which one should you use?

The first thing to decide is if you want the account managed by yourself or a broker. Typically, people who don't mind the fees and don't want to worry about picking their own investments should go for managed. If you want complete control and all of the gains, personally managed is definitely for you.

Brokerage accounts are simple. If you have extra money you're willing to invest and possibly lose, get a brokerage. You can put in and take out at will, though there will always be tax implications. I personally think that everyone should own a brokerage account, even if it's just for a "gambling fund".

Then you have retirement accounts. The real question is whether you want pre or post-tax. Here's my take on the matter. If you're not getting paid a ton and you're still in a relatively low tax bracket, go for a post-tax account. If you're making a lot of money through work and are in a higher tax bracket, get that tax deferred and put it in a pre-tax account. That way when you're retired and are in a lower tax bracket, it's not as big of a hit on the account.

Conclusion

Today we talked about the major types of investment accounts. I hope you learned something, and if you did, be sure to leave a comment and subscribe for more posts. You can also follow me on Instagram, Twitter, and Facebook @barriosfinance to get notified when I post new content. Sometimes on Twitter I'll also post my comments on current events in the financial sector. Next post will be on March 1, 2023 and we'll be talking about all the different kinds of things you can invest in, so be looking for that when it comes. Until next time, see y'all!