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What to Know About Opening an Investment Account

Investing
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A young, smiling professional opening an investment account on her laptop

Before you move forward with opening an investment account, it's important to understand the different types available. Knowing your options can help you choose the right account to support your financial goals.

A financial professional can show you how to set up an investment account and, in most cases, open one for you. But if you're interested in learning how to open an investment account, here's what to consider.

Investment Accounts & Taxes

When you open an investment account, one important consideration is whether or not your investments will receive special tax treatment. This is reserved only for specific kinds of investments, and they typically have restrictions on how the money can be used.

Certain retirement, health and education accounts are tax-deferred, meaning the funds invested are not taxed — and earnings on investments aren't taxed until the funds are withdrawn. Contributions to a tax-deferred account are subject to normal income tax upon distribution.

In other instances, the initial investment amount is taxed, but the earnings are not. Additionally, retirement distributions taken before the age of 59½ will incur a 10% early withdrawal penalty.

Some investments, such as brokerage accounts, are made using after-tax funds, or funds on which taxes have already been paid. Earnings on these accounts are taxed annually, regardless of whether they are withdrawn.

MORE Exploring the Types of Tax Benefits Available at Each Life Stage

Types of Investment Accounts

Before opening an investment account, it's a good idea to know the properties of the different options. Here are the types of investment accounts to consider.

Education Accounts

A common type of education account is a 529 savings plan, which receives special treatment for after-tax contributions. These accounts allow funds to be used for education-related purposes. They can be opened through a brokerage firm such as Western & Southern.

Tax-Deferred Retirement Accounts

There are a few different types of retirement accounts that receive special tax treatment:

  • 401(k) accounts are opened through employers. For 2021, the IRS will allow individuals under age 50 to contribute a maximum of $19,500 (those who are age 50 or older can contribute $26,000).
  • Individual retirement accounts, also known as IRAs, come in two types. For 2021, the IRS will allow individuals under age 50 to contribute a maximum of $6,000 (those who are age 50 or older can contribute $7,000).
    • Traditional IRAs: These use pre-tax funds. Distributions from these accounts are taxed as regular income as long as they're taken after age 59½, otherwise the funds will incur a 10% early withdrawal penalty.
    • Roth accounts: These use after-tax contributions. You won't owe any taxes on your gains in retirement as long as you meet certain requirements for a qualified withdrawal. Distributions taken before you've held a Roth account for five years or longer (or before age 59½) will incur a 10% penalty fee and possibly additional taxes.

Brokerage Accounts

These are also known as taxable brokerage accounts or non-retirement accounts. They can be used for retirement but do not receive special tax treatment like other retirement accounts. They can be opened through various investment firms or banks. In general, they may be worth considering as a way to diversify your portfolio of investments.

Health Savings Accounts

These accounts — also called HSAs — receive special tax treatment and can be opened only by people who have eligible health insurance plans with high deductibles. They can be opened through banks and through employers that administer them. In general, the funds can be used only for qualified medical expenses.

Annuities

While annuities aren't actually investment accounts, they do have some of the same properties, depending on the type of annuity you consider. Annuities are contracts with insurance companies, wherein you make one or more premium payments, and the money has the potential to grow over a specified period of time. The growth can be determined by a fixed percentage in the contract or by the performance of investments in an underlying portfolio. The amount of any gains or losses could also be tied to the performance of an index, such as the S&P 500® or a proprietary index.

In general, annuity growth is not taxed until the funds are withdrawn. Withdrawals from annuities before the age of 59½ are generally subject to an additional 10% tax penalty.

MORE Long-Term Investments vs. Short-Term Investments: What's the Difference?

Ready to Open an Account? Here's What to Do Next

Generally, the best way to open an investment account is to decide on your goals and then consider what type of account would support them.

It's also wise to look at reviews for different investment and brokerage firms to evaluate their fees and incentives, as well as the services they offer and how convenient they are to you. In addition to traditional firms, you could consider a robo-advisor, which generally provides a lower level of service but generally lower fees and costs.

You can talk to representatives at traditional firms about their offerings before opening an account to determine your comfort level and whether they meet your needs. Once you settle on a firm, you'll typically fill out an account application first, after which you would provide the funds for the account. You may want to research the investments in the account and make sure your funds are distributed according to your preferences.

In general, it's a good idea to monitor your account over time and make changes to your investments as needed.

When you're ready to start investing, reach out to a financial professional who can talk about your individual options and help you manage your personal finances. These professionals can provide valuable insight and walk you through how to set up an investment account, including a 529, an IRA or a brokerage account.


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IMPORTANT DISCLOSURES

Securities offered by Registered Representatives through W&S Brokerage Services. Member FINRA/SIPC. All companies are members of Western & Southern Financial Group

Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.