The types of accounts available to investors, including both taxable and tax advantaged accounts.
In this topic, you'll learn:
Cash investments may require no more than a bank account, but other investments are typically held in a brokerage account, although many banks offer tax advantaged accounts, such as Individual Retirement Arrangements or IRAs, where you invest in cash investments such as CDs. A brokerage account may include the services of a stock broker, or you may choose the lower cost option of Internet-based discount firms. Either way, your account allows you to buy stocks, bonds, cash investments. Advanced investors may also use their account to purchase even riskier investments such as commodities and stock options. Some even take out loans to buy stocks, known as "buying on margin."
Brokerage accounts are established as taxable accounts, meaning taxes are paid each year on gains, or as tax advantaged retirement accounts, meaning that taxes are either deferred until withdrawal during retirement or the account may be completely tax free. There are many other types of brokerage accounts, from college savings to charitable trusts, that will not be covered here.
Taxable Accounts
Anyone can open a standard brokerage account. You can invest as little or as much as you want, and the money can be withdrawn at any time. With standard brokerage accounts, you must pay yearly taxes on the money you earn. For investments bought and sold within the same year, your tax rate on the gain is equal to your ordinary income tax rate. Investments owned a year or longer before sale are taxed at a "capital gains" tax rate, which ranges between 0% and 20% (depending on your tax bracket).
Tax Advantaged Retirement Accounts
Tax advantaged accounts such as IRAs are intended to encourage people to save for retirement. You can use a brokerage account or set up a tax advantaged account at a bank. Advantages typically include the ability to grow year after year without paying income tax on the gains, and you may be able to take a tax deduction for contributing to the account. Some tax advantaged accounts allow you to withdraw the money tax free at retirement time. Please see our Saving for Retirement module for more details on the types of accounts commonly used for retirement saving.
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