Written by: JT Beck

While investors know that the primary function of their investment accounts is to buy and sell various securities, it may be more difficult to distinguish the unique characteristics of each type of account. There are many different types of investment accounts, and no two are the same. Discussed in this article are the common accounts that we open for our clients here at Agili, as well as some advantages and drawbacks of each particular account type.

 

Brokerage Accounts

A brokerage account is the most basic type of investment account. These accounts serve investors who are looking to trade securities with no contribution limit. Unlike retirement accounts, brokerage accounts do not benefit from any sort of tax advantages. Any capital gains will be taxed at either 15% for a short term gain (investment held for less than one year) or at the appropriate income tax bracket level for a long term gain (investment held for a year or longer). Generally, there are two types of brokerage accounts that we open for clients:

  • Individual
    • An account with a single accountholder.

 

  • Joint Tenants with Rights of Survivorship (JTROS)
    • An account with two accountholders, who have equal rights. If one account owner passes away, the survivor will automatically obtain the decedent’s share of the assets held in the account. Someone who wishes to share his or her assets with a partner would benefit from a “joint” account – and though less common, a parent and a child could share a joint account.

 

Retirement Accounts

Retirement accounts, as the name suggests, are primarily used for retirement funding. Amongst the most common types of retirement accounts are the Traditional IRA and Roth IRA. For 2020, the maximum contribution to both types of IRAs is $6,000, or $7,000 if you are age 50 or older. While Traditional IRAs and Roth IRAs are both used to save for retirement, they also have many differences.

  • Traditional IRA
    • All contributions are tax deductible in the year they were made.
    • Distributions are taxed as ordinary income.
    • There is a tax deferral on investment earnings.
    • Under Traditional IRA distribution rules, withdrawals taken before the age of 59 ½ will be taxed and also penalized 10%.

 

  • Roth IRA
    • No tax deduction on contributions.
    • Distributions are tax free.
    • As is with the Traditional IRA, there is a tax deferral on investments earnings.
    • Unlike the Traditional IRA, you can withdraw the money you contributed to a Roth at any time without paying taxes or a penalty expense.
    • For 2020, only individuals with gross incomes below $139,000 (or married couples filing jointly with combined income below $206,000) can contribute to a Roth IRA.

* Want more information on the differences between a Traditional IRA and a Roth IRA? Our very own Sarah Caine, CFP recently wrote a piece on titled “When Should I Choose a Roth IRA over a Traditional IRA,” which you can find here.

Then there are Rollover and Beneficiary IRAs, which can be opened for special scenarios described below.

  • Rollover IRA
    • Allows one to consolidate funds from an employer-sponsored retirement plan (such as a 401(k), cash balance plan, or profit sharing plan) to an IRA for continued tax-deferred growth and to avoid early withdrawal penalties.

 

  • Beneficiary IRA
    • Also known as an inherited IRA, this type of retirement account is opened when an individual inherits an IRA after the original account owner passes away.

 

Minor Accounts

Are you planning on saving for your child’s future? You may be interested in opening a minor account.

  • UTMA/UGMA Account
    • UTMA/UGMA accounts can be used to fund college tuition, a future down payment on a house or a car, or virtually anything that a child may need as a young adult.
    • You are able to contribute as much as you want to a UTMA account, but contributions higher than $15,000 a year (or $30,000 for a married couple filing for taxes jointly) will incur a federal gift tax.
  • 529 Account
    • Want to get a jump start on college funding for a child? Funds for a 529 plan can only be used for the purposes of saving for a child’s college expenses. Virginia Business published an article by Agili’s Jamie Malone that goes over the advantages and limitations of 529 plans. Click here to read it.

 

Trust Accounts

A trust account allows a trustee to hold assets on behalf of a beneficiary (or beneficiaries), through a fiduciary agreement. Generally, the purpose of a trust account is to pass on assets to family, friends, or entities (such as a charity) after the death of the trustee.

  • Trust Account
    • A big advantage of holding a trust account is that it can bypass the probate process. This enables beneficiaries to avoid court and reduces estate taxes.
    • With a trust account, you are able to specify instructions for the trust, largely in regards to distributions (to whom they are sent, when, and how).

A common term that has come up throughout this piece is “beneficiary.” For many accounts, the owner has the ability to designate a beneficiary to inherit assets in the event of the accountholder’s death. It is not uncommon to have an out-of-date beneficiary listed on an account, which can be very costly for an account owner, according to CNBC. A few situations that may warrant a beneficiary update include marriage, divorce, birth, or death. Be sure to check on your beneficiaries as these types of life events develop.

It can be quite overwhelming to consider all the different types of accounts available. Not only is the particular account important – account maintenance operations are an integral part of establishing an optimal financial plan. At Agili, our team will help identify which accounts are right for you and your unique financial situation. Please do not hesitate to contact your Financial Strategist to learn more about your existing account or to explore if opening a new account may be suitable for your financial needs.