If you like having options, you’ve got plenty when it comes to investment account types. What’ll it be, an IRA? Taxable account? College savings account? That’s one of the first questions financial firms ask when you set up an account.
This guide to the various types of investment accounts will help you find the best one based on your savings goals, eligibility, and who you want to retain ownership of the account (yourself, you and someone else, or even a minor).
Investment account types
1. Standard brokerage account
A standard brokerage account — sometimes called a taxable brokerage account or a non-retirement account — provides access to a broad range of investments, including stocks, mutual funds, bonds, exchange-traded funds and more. Any interest or dividends you earn on investments, as well as any gains on investments that you sell, are subject to taxes in the year that the money is received.
With a non-retirement account you have a choice in how it is owned:
Individual taxable brokerage account: Opened by an individual who retains ownership of the account and will be solely responsible for the taxes generated in the account.
Joint taxable brokerage account: An account shared by two or more people — typically spouses, but it can be opened with anyone, even a non-relative.
When you open a brokerage account, the firm will likely ask you whether you want a cash account or a margin account. A cash account is appropriate for the majority of investors. It allows you to buy investments with money you deposit into the account. A margin account is for investors who want to borrow money from the broker to buy investments. Margin trading is a riskier type of investing that is best suited for advanced traders.
Eligibility: You must be a legal adult (at least 18 years old) and have a Social Security number or a tax ID number (among other forms of identification) to open a brokerage account.
Good to know: There are no limits on how much money you can contribute to a taxable brokerage account, and money can be withdrawn at any time, although you may owe taxes if the investments you sell to cash out have increased in value.
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2. Retirement accounts
A retirement account, such as an IRA, or individual retirement account, is a standard brokerage account with access to the same range of investments. The biggest difference between a retirement account and a brokerage account is how the IRS taxes — or doesn’t tax — contributions, investment gains and withdrawals.
The most common types of retirement accounts are traditional IRAs and Roth IRAs. Many brokers also offer specialty retirement savings accounts for small-business owners and self-employed individuals, such as SEP IRAs, SIMPLE IRAs and Solo 401(k)s. If the company you work for offers a 401(k) plan and matches any portion of the money you save in that account, contribute to the 401(k) before funding an IRA.
Depending on the type of IRA you choose, you get either an upfront tax break in the year you make contributions to the account (with a traditional IRA) or a back-end tax break that makes your withdrawals in retirement tax-free (via a Roth IRA). Joint IRAs are not allowed.
» All your IRA questions answered: See NerdWallet’s IRA Guide
Eligibility: You must have earned income (or a spouse with qualified earned income) to be eligible to contribute to an IRA. There are also income limits for contributing to a Roth IRA and for deducting contributions to a traditional IRA. Read more about IRA eligibility rules here.
Good to know: The maximum an individual is allowed to contribute to an IRA is $6,000 in 2020 and 2021 ($7,000 if age 50 or older). Per IRS rules, there may be taxes and penalties for dipping into IRAs before age 59 ½. If you think you’ll need access to the money early, the Roth IRA provides more penalty-free options.
These providers offer ample tools and guidance for savers looking for a place to open an IRA.
» Think you need an IRA? See our top-rated providers
3. Education accounts
One of the most popular types of accounts used to pay for education expenses is the 529 savings plan. (This is different from 529 prepaid tuition plans that let you lock in the in-state public tuition at the institution that runs the plan.) Most states offer their own 529 plans that you can open directly, but typically the money can be used at eligible schools nationwide. Some brokerages also allow you to open a 529 account. For example, TD Ameritrade offers 529 accounts through Nebraska’s plan, and Wealthfront offers them through Nevada.
Another education savings option is the Coverdell Education Savings Account. An ESA must be set up before the beneficiary is 18, and, like 529s, the money can be used for college, elementary and secondary education expenses.
Eligibility: Relative or not, anyone can contribute to these plans on behalf of a beneficiary. And anyone can be named a beneficiary on the account, as long as the money is used for qualified education expenses.
Good to know: Contributions to 529s and ESAs are not tax-deductible (though you might get a state tax deduction on 529 contributions), but qualified distributions are tax-free.
4. Investment accounts for kids
The investment accounts above require the owner to be at least 18 years old. But what about brokerage accounts for the budding young Buffett you know? There are a few options to accommodate minors:
Custodial brokerage account
This investment account is set up for a minor with money that is gifted to the child. An adult (the custodian) maintains account control and transfers assets to the child when he or she turns the “age of majority,” which is either 18 or 21, depending on state laws.
Two types of custodial accounts are the Uniform Gift to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA). The difference is the type of assets you’re allowed to contribute to the account. UTMAs are able to hold real estate, in addition to the typical investments allowed in both types of accounts (cash, stocks, bonds, mutual funds). Once the money is in the account it cannot be transferred to another beneficiary.
Eligibility: A child does not need earned income for a UGMA. Some states allow UGMAs, some allow UTMAs and some allow both. A broker can determine whether your state allows you to open one for a beneficiary.
Good to know: Unlike money in an education account, money put into a UGMA or UTMA can be used for any purpose, not just college tuition. And be aware that if the child applies for financial aid, the assets in a custodial account are considered the student’s and can impact their eligibility and the amount of the aid package.
If a child has earned income, they are eligible to contribute to a Roth or traditional IRA. The account is set up and maintained by an adult who transfers it to the child when they turn 18 or 21.
Eligibility: The earned income can come from anything, including babysitting, an informal lawn-mowing business or Instagram sponsorships, as long as it is reported to the IRS.
Good to know: In a Roth IRA, contributions — but not investment earnings — can be pulled out at any time without incurring income taxes or an early withdrawal penalty.
» Here’s more on how to open a brokerage account for your kids
Where should you open your investment account?
Most financial institutions offer, at a minimum, standard brokerage accounts and IRAs. Many also offer education savings accounts and custodial accounts.
If you want to pick and manage your investments on your own, opening an account at an online broker is the way to go. Here’s our list of the best online brokers for beginner investors.
If you want someone to manage your money for you, a full-service broker (a firm with an investment advisor calling the shots) or a robo-advisor can take the reins. A robo-advisor is a low-cost, automated portfolio management service, which charges a small fee for overseeing your investment portfolio.
» See our picks for the top robo-advisors