Types of Investment Accounts
Posted on September 6, 2008
Filed Under Free Financial Course |
Types of Investment Accounts
(This is a continuation of the lesson: Investments).
Now we will discuss how to actually purchase investments. Typically, in order to purchase different types of investments, you will need to open up an investment account with your bank or an investment brokerage firm. Here are the typical accounts that you can open:
- Individual investment account. This type of account will allow you to buy and sell (on your own or with the help of an advisor) without restrictions; however, there are no tax advantages.
- Individual Retirement Account (IRA). This is a great account to invest money for retirement because it provides tax advantages. The money placed in an IRA is considered pre-tax and you pay no taxes on returns until you take the money out. Because you do not have to pay taxes on your money it will grow larger. You can contribute $4,000 per year tax free. However, if you pull out your money before you reach 59 ½, you will have to pay taxes PLUS you may have to pay an additional penalty.
- Roth IRA. A Roth IRA is similar to a regular IRA, except that it is after-tax money. Therefore, you do not get an additional tax deduction for this type of account. However, after the age of 59 ½, you can pull your money out tax free.
- 401(k) Plan. Many employers offer a 401(k) plan to their employees. This allows you to have money pulled from your paycheck each month and invested in mutual funds before tax. In addition, employers will typically match your investment up to 6% of your income. If your employer offers a 401(k) plan you should be investing as much as possible in it.
If you currently would like to open one of the above mentioned investment accounts, you have many options. For those just getting started, a good option is Zecco.com. They do not have any account minimums, and they are FREE to use (Zecco stands for Zero Commission). You could save hundreds, if not thousands of dollars in commissions by using them. If you do not have an account, or would like to save on commissions from an existing account; we recommend visiting Zecco.com.
Investing is an essential part of planning for retirement. As we have discussed, using the time value of money, investments can grow very quickly. The examples below shows what $500 a month earning a return of 6%, 9%, and 12% can do over 30 years:
- $500/mth at 6% for 30 years = $502,257
- $500/mth at 9% for 30 years = $915,371
- $500/mth at 12% for 30 years = $1,747,482
These examples assume no previous savings. As you can see, simply earning the average market return of 12% over the next 30 years will grow your $500 savings into a healthy nest egg of nearly $1.8 million.
Invest with a Plan
Overall, it is important to invest with a plan.
- First, determine how much you need to retire on.
- Second, determine how many years before you plan to retire.
- Third, figure out what type of return you will need to meet your retirement savings goal.
- Fourth, pick investments that you are comfortable with (and will still allow you to achieve your investment/retirement goals).
- Fifth, open the appropriate accounts in order to meet these goals.
In addition, you would be wise to consult a financial advisor. A good advisor will be able to determine which specific funds or investments are appropriate for your individual situation.
Review of Investments Lesson:
- Determine how much money you need to retire on.
- Develop a savings and investment plan to make it happen (or contact a Financial Planner.)
- Upgrade your savings account to earn more. E-loan currently offers a great rate of return on an FDIC insured savings account. Learn more here.
- Open an investment account. Or switch to a less expensive account like Zecco.com.
Once this review has been completed, please continue onto the next lesson of Wealth Protection.
Keyblast.com offers a free financial course to help improve personal finances. If you have not done so already, please start from the beginning and learn How to Budget.