Review Of Different Investment Accounts And Investment Securities

In this week’s post, I will briefly review the different account types and security types we have discussed the last couple of months. The list of different accounts and securities we have covered is not exhaustive and we will plan to revisit this and add additional accounts and securities in the future.

As we have emphasized a lot, remember that the type of investment account is distinct from the account’s investment holdings, as we covered in a previous post. The account has its own rules and tax treatment independent from the investments held within the account.

We have covered four different types of accounts

We have covered four different types of investment accounts. Below are brief summaries:

• Traditional IRA – A traditional IRA provides tax benefits to people saving for retirement. In certain circumstances, contributions can be tax-deductible (reduce taxable income) and then subsequent withdrawals in retirement will be fully taxable. All growth is tax-deferred.

• Roth IRA – A Roth IRA provides tax benefits to people saving for retirement. Only people with income below a certain level can contribute (high income earners can’t contribute). Contributions are not tax-deductible (contributions are made with after-tax dollars). Growth and qualified withdrawals are tax-free.

• 529 Plan – A 529 plan provides tax benefits to people saving for education expenses. Contributions are made with federally after-tax dollars (no federal tax deduction is available). Growth and qualified withdrawals are tax-free. Certain state tax deductions may also be available.

• Health Savings Account (HSA) – A health savings account (HSA) provides tax benefits when saving for health care expenses. Individuals or families must have a high deductible health plan (HDHP) in order to contribute. Contributions made by individuals are tax-deducible. Employer contributions, made to employees’ accounts, are not included in income. Earnings and qualified distributions are tax-free.

We have covered four different types of securities

We have covered four different types of investment securities. Below are brief summaries:

• Stocks – Stock is ownership interest in a company. Shareholders are entitled to vote on certain company decisions. Shareholders benefit from receiving dividends (a portion of the company’s profits) and price appreciation (the shares increasing in price).

• Bonds – Bonds are loans. Money is being lent to the institution selling the bonds. Bondholders (typically) receive periodic interest payments. The price of a bond can also increase in a bondholder’s favor. Different types of institutions issue bonds: the federal government, federal agencies, state and local municipalities, corporations, etc.

• Mutual Funds – Mutual funds are investment companies that pool investors’ money and buy a variety of underlying securities, such as stocks and bonds. Mutual funds provide their investors with diversification (owning many different things) and professional management. There are funds with many different types of investment objectives. There are yearly management fees.

• Exchange Traded Funds (ETFs) – Exchange traded funds (ETFs) are shares in investment companies that own underlying securities. They are similar to mutual funds, but their shares trade on an exchange. Because their shares trade on an exchange, ETFs allow for investors to buy and sell throughout the trading day. ETFs also (typically) have low fees and allow investors to diversify.

Examples of different account types with different investment holdings

Below are some visual examples of different types of investment accounts with different investment holdings within them. This is very similar to the graphic included in the series’ initial post. After having gone through the different account and security types, I hope you now have more confidence about what each type of account is designed for and the potential advantages it offers. Similarly, I hope you now have a better understanding of the different types of securities and their features.

The examples show:

1. Mutual funds within a 529 plan.

2. Stocks and bonds within a traditional IRA.

3. Mutual funds within a health savings account (HSA).

4. A combination of different securities within a Roth IRA.

If you have any comments, questions, or ideas for future posts, please let me know

I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.