Once you have figured out what types of investments you want to utilize in your investment portfolio, then you must look at what kind of account you want to own those investments through. Let’s take a look at several account types you can utilize to accomplish building your investment portfolio.
The easiest way you can get started with building your investment portfolio is to set up a traditional retail brokerage account. You can set these up either online or through a local financial advisor. A brokerage account is almost like a bank account for your investments. This account is where your money and investments will be held. You can transfer money into the account from your regular bank account. Once your money is in the brokerage account, you can then start purchasing your investments to build your portfolio. Within a brokerage account, you can buy stocks, bonds, mutual funds, ETF’s, CD’s, money markets funds, options, real estate investment trusts, and precious metals. Basically, this account can help almost everyone build their investment portfolio no matter how they choose to invest their funds. Standard brokerage accounts do not have any restrictions as far as access to your money. They do not have any tax benefits, so you can move your money in and out freely. Any capital gains or any kind of income from your investments like interest or dividends will be taxed accordingly to the type of gains or your tax bracket.
If you are looking for an account that allows you to invest in the same types of vehicles as a brokerage account, but you would like to have some added tax benefits, then you can choose to open a Traditional IRA or Roth IRA either at an online brokerage or through your local financial advisor. The accounts work almost identical as far as your ability to invest in a wide range of investments, but now you are utilizing the funds under the umbrella of a Traditional or Roth IRA. The main differences between the two is the traditional IRA has a tax deduction on the money you put into it, while the Roth does not have a tax benefit for the money going into it, but rather you do not pay any taxes when you take it out so long as you meet all the requirements. The other thing to keep in mind is that you are limited to the annual contribution limits on an IRA. You can’t just put as much money as you want into them. If you plan on putting more money to work than the annual contribution limit, then you may need to open that brokerage account to help you meet your investment goals.
Other retirement vehicles you may have access to are company sponsored retirement plans such as a 401k or SIMPLE IRA. If you are a Self employed individual, you may be able to establish a SEP IRA or a solo 401k, as well. Company sponsored retirement plans like 401K’s and SIMPLE IRA’s are great options for you to take advantage of if your employer offers them. They usually have a match you can receive so long as you contribute up to a certain amount of your own funds. These company sponsored plans provide a tax deferred way for you to save some of your paycheck plus get the extra from your employer’s match. One of the negatives to a 401k is the lack of options to invest your money. Typically 401k’s and SIMPLE IRA’s only offer certain funds that you can choose to have your funds invested, unlike a brokerage or traditional IRA, where you can choose a wide range of investment options. If you are a business owner and it’s just you working in the business or you and a close family member, then you can opt for a SEP IRA. This is a fantastic option if you meet the criteria. You can contribute up to 25% of your gross wages, the money is tax deferred, you can have as many investment options as a brokerage account would, and you have longer to fund your SEP than other types of retirement funds. The only thing that you have to be aware of is that if you have any other employees, you have to contribute the same percentage of their pay to the plan as you do your account as the business owner.
There are some other types of accounts you may choose from for your children if you want to start an investment portfolio for them. If your children are under 18, you can actually start them what’s called a Uniform Transfer To Minors Account (UTMA) or Uniform Gifts to Minors Account (UGMA). These accounts will have a custodian such as the parent or grandparent, whoever sets up the account for them, then the child is listed as the beneficiary. Basically, you can contribute funds to these accounts for your children or grandchildren, you take advantage of their tax bracket for any income or gains that are received, and you can invest the funds the same as you would a brokerage account. There are no other tax benefits with these types of accounts other than the use of the minors tax bracket. If you wanted to help the child or grandchild save for college, you could also look at setting up a 529 plan. These plans are set up similar to UTMA or UGMA accounts, but your investments will grow tax deferred until its time to use the funds for qualified education expenses. If the funds are used for qualified expenses, then there are no taxes that have to be paid on any of the gains used for those expenses. If funds are withdrawn to be used for anything other than qualified expenses, there may be a 10% penalty applied to the earnings. The main negative to the 529 plan is if the child or grandchild chooses a path that does not require a degree in higher education. The other restriction that may apply to the 529 plan, there may be a limited number of investment options in the account. Typically, mutual funds or ETF’s are the only options available in these types of plans.
These are some of the most popular and widely used types of investment accounts the majority of investors can utilize to build their portfolios to help them reach their investment goals. Depending on your situation, you may be fine doing this by yourself, but I highly recommend you seek the help of a professional financial advisor who can help guide you on your investment path.