Linda @ The Cents of Money
What kind of investment accounts do you need for your financial goals?
There are various investment accounts, depending on your lifecycle and financial goals. Choose investment accounts that advance your goals. Your goals may include beginning to invest, saving for retirement and college, maintaining liquidity for emergencies, and implementing tax optimization strategies. These accounts can help you build wealth.
Families may want to set up college savings or custodial accounts for young children, including a Roth IRA. Young investors may want to open a standard brokerage account and deposit some cash to get started buying index funds. Conversely, advanced investors may seek more risk and enjoy access to options like buying on margin and short selling.
4 Investment Accounts That Best Advance Your Financial Goals
1. Standard Brokerage Accounts
To open a brokerage account, you must be at least 18 and have a Social Security number or a tax ID. A standard brokerage account is a taxable investment account that allows you to deposit and hold cash to buy various investments, such as stocks, bonds, money markets, mutual funds, index funds, or ETFs.
Taxable accounts require holders to pay taxes on any interest or dividends they earn on investments and any investment gains realized in the year in which the investments are made.
Cash and Margin Accounts
Typically, most brokerage accounts are cash, but some investors want to open a margin account. You can build your brokerage by depositing enough money to take advantage of a market downturn and pick up stocks at reduced valuations.
A margin account requires an investor to have cash for liquidity. When you buy securities on margin, you borrow money from your brokerage firm to purchase securities or short selling. These strategies carry high risks.
Individual and Joint Accounts
You can open an individual or joint brokerage account. An individual account means the holder retains ownership and is responsible for paying taxes earned. A joint account includes two or more people, often spouses or partners, children, or other family members, but it can also be a non-relative.
Self-Directed Account or Financial Advisor
Investors, especially young beginners, may want a self-directed brokerage account to take control over their investments and make choices over the type of securities, individual stocks, ETFs, cryptocurrencies, and mutual funds they buy for their portfolio.
They may prefer doing their research and can save money by not paying for a financial advisor, especially when managing a relatively small account. You can learn investment strategies like dollar-cost averaging and how to harvest tax-loss selling to reduce taxes.
In the long term, investors may want access to a financial advisor. A financial advisor can help investors build an investment portfolio for their short-term and long-term financial goals, as well as develop tax optimization strategies.
Many options exist, including traditional brokerage firms, Robo-advisors, online trading platforms, and wealth management firms.
2. Retirement Accounts for Everyone
Traditional 401K Plan
Saving for retirement at an early age usually begins with employer-sponsored 401(k) or Roth 401 (k) retirement account plans. We’ve updated the rules and limits for 2025, as the IRS typically releases requirements for 2026 by early November of the preceding year.
About 67% of private industry workers had access to a defined contribution plan like the traditional 401(k), though only 49% actively participated in it. Most 401(k) plans provide at least three investment choices in your 401(k) plan, but some sponsors, like Vanguard, provide more options.
Contribution Limits
The IRS limits the maximum contributions to up to $23,500 in 2025, which applies to both traditional (pre-tax) 401(k) and Roth (after-tax) 401(k) plans that an employee may contribute to an employer-sponsored plan. Additionally, the 401K “catch-up” provision permits workers age 50 or older to contribute up to $7,500, bringing the combined total amount to $31,000. Recognizing those who are approaching retirement, the IRS introduced a new and additional “super catch-up” amount for those between the ages of 60 and 63 of $11,250, for a combined amount of $34,750.
Eligibility
The IRS imposes eligibility requirements based on compensation limits on retirement plans (e.g., 401K and IRA), subject to annual cost-of-living adjustments, often linked to inflation. The limits consider whether a workplace plan exists and whether a taxpayer is filing single or jointly. Check the IRS website for various eligibility limits.
Match Contributions
Some employers will match a portion of your contribution to a percentage of your salary, like 5%.
For example, if you earned $60,000 per year and your employer matches a generous 100% of your annual contribution (or $3,000) to your 401 (K), your employer would contribute 5% of your salary or $3,000 more to your account. If your employer matches 50% of your contribution, you get $1,500 rather than $3,000.
It would be best to prioritize contributing a large enough amount to earn your employer’s full match, as it is part of your compensation, and you don’t want to lose it.
As part of the SECURE 2.0 Act in 2022, some employers may choose to match qualifying student loan payments as they would 401(k) contributions.
Required Minimum Distributions
Most traditional retirement plans, including traditional 401(k) and traditional IRA plans, are subject to required minimum distributions (RMDs). You must begin taking distributions for these plans at age 73 if born between 1951 and 1959, and at 75 if born in 1960 or later.
The RMDs apply to:
All employer-sponsored retirement plans, including:
- Profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.
- Roth 401(k) accounts.
- RMD rules do not apply to Roth IRAs while the owner is alive.
Roth 401 (k) Plans
Increasingly, employers are offering Roth 401K retirement plans, with 70% of companies providing this option. Unlike Roth 401(k) plans, traditional 401K contributions are pre-tax, and once you begin to withdraw from your account in retirement, you’ll have to pay your taxes at your current rate. Similar to traditional 401(k) accounts, you are making after-tax contributions to your Roth 401K and will not have to pay taxes upon withdrawal in retirement.
Traditional Individual Retirement Accounts (IRA)
If you don’t have access to an employer-sponsored 401 (k) plan, or even if you do, you can personally set up your retirement account with a traditional IRA or a Roth IRA. Roth IRAs are preferred plans for being more tax-friendly. You don’t have RMDs and don’t pay penalties or taxes upon contribution withdrawals before age 59.5, but you can’t withdraw earnings from contributions.
Traditional IRAs, which have been typically used for retirement savings, normally incur ordinary taxes and a 10% penalty for withdrawals before age 59.5.
However, there are exceptions for those withdrawing from a traditional IRA if you are leaving the service, experiencing financial hardships from medical costs, birth or adoption, or foreclosure. Also, you may withdraw money from an IRA account early to pay for qualified college expenses for yourself, your spouse, your children, or your grandchildren without being penalized.
Frankly, consider withdrawals from retirement accounts as a last resort, as these accounts are for your financial future.
Contribution Limits and Withdrawals For IRAs
The limit on annual contributions to a traditional IRA is up to $7,000 in 2025, and the catch-up amount for those aged 50 and over is $8,000 (an additional $1,000), and is subject to cost-of-living adjustments.
Similar to the 401(k), traditional IRA withdrawals begin at age 73 as required minimum distributions (RMDs).
Roth IRAs
With Roth IRAs, you contribute after-tax dollars, and your money grows tax-free. Your withdrawals are tax-free after 59.5 years.
Roth IRAs have no required minimum distributions like the traditional IRA counterpart. You may be able to withdraw your contributions, not your earnings, before age 59.5 years without penalty if your Roth IRA has existed for five years or more.
In many ways, a Roth IRA has become the preferred vehicle for personal retirement accounts.
3. Education Accounts
Investment accounts are excellent ways to save for qualified education expenses. The 529 Savings Plans and the Coverdell Education Savings Account are the most popular savings vehicles. You can do both plans for the same beneficiary if it suits your needs.
529 College Savings Plans
A 529 plan is a college savings plan that offers tax-deferred savings and financial aid benefits. Originally begun to save for college, families may now use the plans to save and invest for K-12 tuition at private schools, trade schools, and other vocational training, retaining their tax-deferred nature.
Every state has a 529 plan; you do not have to live in that state to set up an account in each child’s name. Each state plan may vary, so check what works for you.
There are no maximum caps on how much money you can invest annually. State tax treatment of these withdrawals differs from state to state. So, check with your state’s taxing authority or state 529 plan administrator.
Parents can typically choose various investment portfolio options, including Vanguard mutual funds, ETFs, allocation funds, and age-based portfolios. Which fund you choose depends on your appetite for control and risk. You can adjust the funds based on your children’s age or the target date portfolios, which gradually shift from more aggressive growth rates to more conservative rates as your child ages.
The 529 plans typically do not have income or age limits. An older person can use it for school later on.
Coverdell Education Savings Accounts (ESAs)
These accounts are similar to 529 plans, offering tax-free investment growth and tax-free withdrawals when you use the funds on qualified education expenses. Like 529 plans, the invested amounts are not limited to college and can be used not only for K-12 tuition but also for expenses, including books.
Contributions to Coverdell ESAs are limited to $2000 annually per beneficiary, similar to limits set for IRAs. A Coverdell investment option is self-directed, so you have more options. Grandparents can each set up their account for the same beneficiary, with a $2,000 limit for each account.
Coverdell ESAs have age and income limits. A beneficiary must use the funds by age 30 unless the beneficiary is a special needs person. You can no longer contribute if your adjusted gross income is over $220,000 as a married couple or $110,000 as a single taxpayer.
4. Custodial Accounts: Roth IRA, UGMA, UTMA
Custodial Roth IRAs
Although you could set up a traditional IRA for your child, the contributions to a Roth IRA benefit from the likelihood that the child’s earned income will have a relatively low tax rate when you contribute to their account. The child’s income could come from performing personal services and receiving salaries, wages, tips, and net earnings from a parent’s self-employment if they helped in the business.
Creating a Roth IRA for your children provides more flexibility before adulthood, as these funds can help pay for college, make a first home purchase, or retire.
A Roth IRA is preferable to a traditional IRA with after-tax contributions, tax-free growth, and withdrawals. Once your child becomes an adult, their custodial account needs to convert to a regular Roth IRA in their name.
Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA)
Parents can set up these custodial accounts for each child if they are under 14 years and managed by the parent until the child turns the age of majority, typically age 18 years, unless stated otherwise.
Investments in these accounts are not limited.
For children below 18, the first $1,100 of unearned income from the investment is tax-free to the child, after which the next $1,050 is taxed at the child’s tax rate, then income above $2,200 is taxed at the parents’ (usually higher) tax rate. When the child turns 18, they will pay taxes at their rate.
Couples filing jointly can contribute up to $30,000 annually for each child or $15,000 if an individual sets up an account. Everyone, including grandparents, aunts, and uncles, can set up a custodial account.
Once the child has access to the account based on their age of majority, it becomes their asset.
Investment Accounts To Fulfill Your Financial Goals
Besides having savings and checking accounts at the bank, it is essential to understand the various investment accounts to fulfill your short-term and long-term financial goals, such as investing, saving for retirement, and your children’s education, tax advantages, and building your wealth.