3 Types of Brokerage Accounts You Should Have

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It’s a good idea to open several different kinds of brokerage accounts to meet different needs. Read on for a rundown of which ones to open. 

Opening a brokerage account is very important. You need a brokerage account so you can invest your money and earn reasonable returns that help your wealth grow.

While money you need in the short-term (around two to five years) should be in a savings account, funds you are setting aside for long-term goals should be invested with a broker so you can benefit from compound growth.

In fact, most people shouldn’t just have one brokerage account. They should have several. Here are three different kinds you should seriously consider opening.

1. A tax-advantaged retirement account

In many situations, it makes sense to open either a traditional or a Roth IRA with a broker in order to save for retirement. This is true whether you have a 401(k) at work or not.

A 401(k) is a simple retirement plan to use because your employer opens and administers the account and you can just sign up to have contributions withdrawn from your pay. Your employer may also match some of your contributions. But, you have very few investment options with most 401(k) plans.

After you have invested enough to earn your full employer match (if you have one), then you should open a traditional or Roth IRA with a broker. Both offer you many more investment choices, and both come with tax breaks. A traditional IRA gives you upfront tax savings when you contribute, while a Roth provides the tax savings when you make withdrawals but you contribute with after-tax dollars.

Using a tax-advantaged retirement account just makes sense as the government subsidizes your savings through generous tax breaks. If you contribute $1,000 to a traditional IRA and you’re in the 22% tax bracket, you could save $220 on your annual taxes. The government is essentially giving you that money now to help you invest for your future (although you will eventually be taxed on withdrawals later).

Most brokers allow traditional or Roth IRAs, so consider opening one ASAP. If you think you are paying higher taxes now than you will as a retiree, a traditional account is the right way to go. Otherwise, opt for a Roth.

2. A taxable brokerage account

Taxable brokerage accounts don’t come with the tax advantages that retirement plans do. But, it’s still a good idea to have one. That’s because you won’t have restrictions on withdrawals like you do with tax-advantaged accounts.

With IRA accounts, for example, you usually can’t take the money out until age 59 1/2 without paying a penalty (although there are some exceptions). If you think you might want to retire early, you would want a taxable brokerage account to draw from until retirement age.

A taxable brokerage account can also help you save for other long-term goals beyond retirement, and is just generally a good way to grow a big pot of money you can use to amass a larger net worth.

3. A 529 account

If you have kids and you want to help them go to school, a 529 account could be the ideal option. You can contribute to a 529 plan and the child who the account benefits can use the money to cover any qualifying educational costs. You don’t get a federal tax deduction, but some states make contributions deductible. And your child can make tax-free withdrawals for qualifying costs.

You can open a 529 directly with your state, but you can also open one at a brokerage firm as well. Using an account through a brokerage firm can give you more investment options than your state’s plan so you have the flexibility you need to make the best investments for your child’s future.

If you can open all three of these kinds of brokerage accounts and start putting some money into them, you will be well on your way to building wealth and setting yourself up for financial security.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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