What type of investment account may be best for you
Investment accounts hold investments such as stocks, bonds or annuities. Accounts such as 401(k)s and IRAs are not investments themselves, but accounts that store investments, similar to how bank accounts hold cash. Independent investment managers, such as Aesop Advisor, partner with account custodians to open and maintain investment accounts on behalf of clients.
There are several different types of investment accounts, and the primary difference is usually how they are treated for tax purposes. To receive preferential tax treatment, tax-advantaged accounts have limits and criteria that need to be met.
Retirement planning is the most common reason for individuals and households to have investments.
1. Traditional IRA
IRA stands for Individual Retirement Arrangement, and is commonly referred to as an individual retirement account. The main feature of a traditional IRA is that taxes on any contributions or withdrawals are deferred until you begin withdrawing from the account in retirement.
2. Roth IRA
Roth IRAs were introduced by Congress in 1997. The main feature of a Roth is that although you will pay tax on all contributions, you will pay no taxes on withdrawals once you begin withdrawing from the account in retirement. Both Roth and traditional IRAs can be opened by individuals in addition to or in place of employer plans.
4. Employer Accounts
Employer-sponsored retirement plans may offer account types such as 401(k)s and 403(b)s. Though similar in tax treatment, employer-sponsored plans typically have a more limited selection of investment products available than individual IRAs. Also, employees are typically responsible for choosing their own investments in an employer-sponsored account.
An employee pension is a form of an annuity, which makes a guaranteed continuing payment. The payment amount can be based on several factors such as length of employment and salary. Employees have no control over how deductions from their paychecks are invested in pension funds. Pensions pay during the life of the payee or their eligible surviving spouse, and can not be passed on to any other beneficiaries. Aesop recommends that employees with pensions additionally contribute to an investment retirement account through either an individual IRA or an employer-sponsored account such as a 401(k) or 403(b). Choosing a lump sum pension at retirement may also be a good choice for many.
Though retirement planning is the primary reason individuals and households typically invest, there may be other situations appropriate for investing.
1. College Planning
An Educational Savings Account (ESA) may be a good option for those preparing for their child’s college career. It allows for preferential tax treatment for withdrawals made for qualifying educational expenses.
For those who want to contribute more towards college funding than the allowed limits of an ESA, a 529 plan may be a good option.
Individual investment accounts are often called taxable accounts, as all contributions and capital gains will be taxed in the year they occur. Because they have no tax benefits, individual investment accounts are usually used for purposes that are shorter-term than retirement planning. For those who are solidly on track to fully-fund retirement, and who have additional investable money after fully-funding retirement and paying costs of living, an individual investment account in addition to a fully-funded retirement account may be a good option.
Click to view our fees.
Click to answer a couple questions to help decide if Aesop might be a good fit for you. (No submission required)
Click to learn more about investment options based on your circumstances.
Click for more about our account custodians/brokerages.
Click for frequently asked investment questions.