Understanding Investment Accounts

September 29, 2019

Investment
accounts sound simple. It’s an account for investing!

However, there
are multiple types of investment accounts, each with their own pros and cons.
Picking the right kind of account is key, as it may impact what you’re able to
accomplish with the money you earn from investing.

Whether it’s for
retirement or profit, here’s what you need to know.

Individual Retirement Accounts
(IRA)

Traditional IRA

A traditional
IRA allows for people investing in their retirement to set aside money that has
not yet been taxed. One downside to a traditional IRA is the maximum
contribution limit of $5,500 or $6,500, depending on your age.

These are good
for people that would have set aside money for their retirement anyways, as
you’ll stave off paying taxes on the money in your IRA until it’s withdrawn. At
that time, it will be subject to that year’s taxes.

Roth IRA

The biggest
difference between a traditional IRA and a Roth IRA is when you pay taxes on
the money contributed.

Whereas you
don’t pay taxes that year on the money you set aside in a traditional IRA, the
money you contribute to a Roth IRA has already been taxed.

This is
important when you start withdrawing once you’re eligible, as money taken out
of a Roth IRA will not be taxed the year you withdraw it.

Employer Sponsored Accounts

SEP IRA

A Simplified
Employee Pension (SEP) IRA can be offered by employers, but there is also a
self-employed version of SEP IRAs. Those who work full time self-employed or
part-time self-employed can take advantage of this.

It’s
essentially an IRA managed solely by your employer. In the case of
self-employment, you are your own employer. It’s not a loophole, as there are
specific guidelines and differences if you decide to create a SEP IRA for
yourself.

The best part
of a SEP IRA? It’s not limited to a set amount of money, but rather a
percentage: 25% your income. Technically, it does still have a set maximum
limit, but it’s currently limited to $53,000 a year.

401K

A 401K is a
retirement plan offered by businesses to their employees, as it is an employer-based
retirement plan. 401K plans can also be traditional or Roth, just as IRAs can,
meaning you can pay the taxes on the money contributed now or later.

SIMPLE IRA

A Savings
Incentive Match Plan for Employees (SIMPLE) IRA is similar to a 401K, but with
more control from the employee. It can be beneficial to the employer, as they
don’t require as many resources to manage on their end. To the employee, they can
be desirable because the employee will always have access to the money within
the account, just as they would in a traditional or Roth IRA.

However, they
will still incur penalties if money is removed before the age of retirement, as
determined by the U.S. government.