If you’re a young investor planning to start investing, it can be overwhelming to navigate the plethora of investment accounts available today. It’s crucial to choose the right account type that meets your financial objectives, risk tolerance, and investment horizon. Here are the best 12 investment accounts handpicked for you:
1. Traditional Individual Retirement Arrangement (IRA)
A Traditional IRA is an individual retirement account for people who would like to defer taxation until retirement. With a traditional IRA, you can contribute up to $6,000 per year (or $7,000 if you are over 50), and the contributions are tax-deductible.
2. Roth Individual Retirement Arrangement (IRA)
A Roth IRA is an individual retirement account that provides tax-free growth. Roth IRA contributions are not tax-deductible, but you can withdraw them tax-free at retirement. You can contribute up to $6,000 per year ($7,000 if you are over 50).
3. 401(k) Plan
A 401(k) Plan is an employer-sponsored retirement account that lets you contribute a portion of your pre-tax salary. These funds are typically invested in a diversified portfolio of stocks, bonds, and mutual funds. A 401(k) plan has a relatively high contribution limit of $19,500 per year, with a catch-up contribution of $6,500 if you’re 50 or older.
4. 403(b) Plan
A 403(b) Plan is similar to a 401(k) plan for people who work for non-profit organizations, schools, or other tax-exempt institutions. Contributions to a 403(b) plan are tax-deferred, and the account comes with a high contribution limit of $19,500 annually, $26,000 if you’re 50 or older.
5. Health Savings Account (HSA)
A Health Savings Account is a tax-advantaged account that lets you save for medical expenses. With an HSA, you can invest pre-tax funds, and unused balances roll over from year to year. Contribution limits for HSAs are $3,600 for individuals and $7,200 for families.
6. Taxable Brokerage Account
A taxable brokerage account is an investment account that allows you to invest in stocks, bonds, mutual funds, and other investment vehicles. Unlike retirement accounts, a taxable brokerage account doesn’t come with any tax advantages and is subject to capital gains taxes based on your earned income. Nonetheless, it provides flexibility and liquidity, making it an excellent option to save for shorter-term goals or to complement your retirement accounts.
7. 529 College Savings Plan
A 529 College Savings Plan is a state-sponsored savings plan that allows you to save for your child’s college education while enjoying tax advantages. These accounts have higher contribution limits to fully fund your child’s college education. You can contribute up to $15,000 per year without triggering the federal gift tax.
8. Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates, or finances income-generating real estate properties. By investing in a REIT, you can enjoy the benefits of real estate investing without owning any physical property. You can invest in REITs through a brokerage account, and they come in different types, including equity REITs and mortgage REITs.
9. Certificate of Deposit (CD)
A Certificate of Deposit is a fixed-term account that pays a fixed interest rate until maturity. With a CD, you can earn a fixed return without taking on much risk. These accounts typically come with mature terms ranging from three months to five years, and the interest rates depend on the term length and the bank.
10. Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are US government-backed bonds that protect you against inflation. These bonds provide a fixed yield and have two components: principal and inflation adjustment. While interest payments remain constant, the principal amount adjusts for inflation.
11. Exchange-Traded Fund (ETFs)
An Exchange-Traded Fund (ETF) is an investment fund that trades on stock exchanges, similar to stocks. ETFs provide investors with diversified exposure to a specific segment of the market, such as technology, energy, or healthcare. You can buy ETFs commission-free through many brokerage accounts.
12. Robo-Advisory Account
A Robo-Advisory Account is a digital investment management platform that uses algorithms to manage your investments automatically. With a Robo-Advisor account, you can invest in a diversified portfolio of stocks and bonds. These robo-advisors charge relatively low fees compared to traditional financial advisors, making them an excellent option for young investors just starting.
Frequently Asked Questions (FAQs)
1. Are there any tax implications in a taxable brokerage account?
Yes, taxable brokerage accounts are subject to capital gains taxes based on your earned income. Long-term capital gains (assets held longer than one year) have much lower tax rates than short-term gains.
2. How do I open an HSA?
You can open an HSA through your employer or an HSA provider. You need to be enrolled in a high-deductible health plan to be eligible for an HSA.
3. What are the benefits of investing in REITs?
REITs provide investors with the benefits of real estate investing without owning any property. They also provide stable cash flow, inflation protection, and diversification.
4. What is the difference between ETFs and Mutual Funds?
ETFs are tradable throughout the trading day, similar to stocks, while mutual funds are priced and traded only at the end of the day. ETFs have lower fees and are usually more tax-efficient compared to mutual funds.
5. Should I use a Robo-advisor or a financial advisor?
While financial advisors provide personalized advice and guidance on your financial goals, Robo-advisors use algorithms to invest and manage your money automatically. If you prefer more personalization, a financial advisor might be the right choice. However, Robo-advisors typically charge relatively lower fees, making them appealing for young investors starting.
Conclusion
Choosing the right investment account can significantly affect your financial future. Consider your financial objectives, risk tolerance, investment horizon, and tax implications before choosing an account. Utilize any of the investment accounts mentioned above to start investing and grow your wealth.
