Getting started with investing can be intimating, but it doesn’t have to be. If you start with one of the basic types of investment accounts, you have the right foundation to save for your future.
Individual Investment Account
The individual investment account is the most basic type of investment account. This type of account has no tax rules or restrictions on when you can buy or sell. You simple put money in, invest in whatever you like, and sell whenever you like. You can add or withdraw funds at any time with no restrictions.
I have my individual investment account at Charles Schwab, but there are many brokerage firms you can use. Other popular options include Fidelity, Scottrade, eTrade, and. I pay less than $10 per trade at Schwab.offers $4.95 trades.
I use it for my individual stock investments like Coca Cola, Walmart, Phillip Morris International, and others. This is where I am building a portfolio for shorter term (less than retirement, but still long-term) investments. I reinvest all dividends here and contribute extra cash for investments when I have it.
A traditional IRA is an investment account for retirement. An “individual retirement account” has restrictions on the amount you can contribute per year. Every dollar you contribute in a traditional IRA is pre-tax, so you lower your tax bill to Uncle Sam when you contribute.
The tax benefit works similarly to a 401(k), which we will get to below. I have a rollover IRA (converted from a 401(k) at Schwab with investments in target date funds and other low-fee mutual funds and index funds.
You can withdraw after you are 59 ½ years old without penalty, though you do have to pay taxes on the capital gains. If you withdraw early, you have to pay a 10% penalty to the IRS.
A Roth IRA is another retirement option, but it is even more advantageous for young people. The contribution limits work similarly to a traditional IRA, but the contributions themselves are post-tax. But, unlike a traditional IRA, you can withdraw tax free when you are in retirement.
You can withdraw the principle (how much you contributed) without penalties at any time, but all capital gains are restricted until retirement unless you are using the money for a first home purchase. If you withdraw gains early, you have to pay a steep tax penalty.
I have a Roth IRA at Schwab where I invest $211 per paycheck automatically. That adds up to $5,500 per year, the current annual contribution limit for someone my age.
401(k) or 403(b)
A 401(k) is more or less an employer sponsored traditional IRA. All contributions are pre-tax and generally go into an account at a financial institution picked by your employer. Most companies match 401(k) contributions, and you should never, ever, ever, ever pass up on that free money. A 403(b) is a similar offering for employees of some non-profits and public schools.
401(k) accounts generally have limited investment options and high fees. To keep my fees in check, I use Empower. That site saved me about $400 per year in fees by showing me high fee accounts where I could find lower fee options.
Where Do You Invest?
Where do you keep your investments? Which types of accounts do you have? Please share in the comments.