TYPES OF ACCOUNTS
TYPES OF ACCOUNTS
There are different types of accounts available for the everyday investor depending on what your needs and objectives are. Here's a quick rundown of the most utilized.
This is the basic type of account where you deposit cash to buy stocks, bonds, mutual funds, and the full amount of your investment plus the stipulated commission must be paid in advance of completing a transaction.
This type is a brokerage account where a broker lets the customer borrow money in order to purchase securities. Securities and cash serve as collateral for the loaned capital. However, margin type of accounts does carry more risk than a cash account type because if the value of the stock purchased “on margin” (or loaned money) drops significantly, the holder of this type of account will be forced to deposit more money or sell some of the stock. We will expand on the margin account type and how to use it effectively in a later chapter.
INDIVIDUAL RETIREMENT ACCOUNTS: TRADITIONAL, ROTH, ROLLOVER
IRAs are a type of investing tool used by individuals to save funds while earning capital gains and dividends specifically for their retirement savings. There are 3 main types of IRAs: Traditional, Roth, and Rollover
Traditional IRAs allow the individual to contribute their pre-taxed income (up to specific annual limits based on total income) and these contributions accrue untaxed dividends or capital gains. However, when you take money out of this account type via a “distribution”, all the money received will be treated as ordinary income and as such may be subjected to income tax. A minimum distribution is required to come out of this type of account by the time the owner reaches age 70 ½, but any distributions that occur prior to age 59 ½ will incur an additional 10% penalty on the total amount taken out of this type of account.
Historically, the government has limited the amount of money per year that can be deposited into an IRA account, depending on your current age. Historical limits are included below:
|Year||Age 49 and Below||Age 50 and Above|
In contradiction to a Traditional IRA, a Roth IRA is funded with after-tax contributions. In a Roth IRA, any capital gains or dividends received will never be taxed. Additionally, the withdrawals made from this account type upon retirement are tax-free, meaning that all that money goes straight to your pocket. Unfortunately, there are income limits for this type of account, unlike the traditional IRA. For married couples filing jointly, your modified adjusted gross income needs to be under $191,000 for a partial deposit or under $181,000 for the full amount allowed annually. If you are single, head of household, or married filing separately, you can add money annually if you make under $129,000 for a phased out portion of the annual maximum or under $114,000 for the full maximum deposit.
A Rollover IRA is a special type of Traditional IRA where employees can transfer assets from their former employer’s retirement plan (e.g. 401k) when they change jobs or retire, essentially keeping the tax-deferred status of those assets. Subsequently, the funds in the Rollover IRA can later be transferred to a new employer’s retirement plan or another Traditional IRA.
529 EDUCATIONAL PLANS
These are relatively new types of accounts which are designed to help families save money for college tuition in the United States. The benefits are as follows:
-No federal taxes are paid on the account’s earnings
-The child doesn’t have control over the account and if he/she decides not to go to college, the account can roll over to another family member.
-Anyone can contribute to the account.
-There are no income limitations
-In most instances, there is no age limit for when the money has to be used.