AIP ACCOUNT TYPES
What Type of Investment Account Should I Open?
If you are interested in opening an investment account, deciding on the best option may seem overwhelming. Start by asking yourself these questions:
1. What am I saving for?
2. When will I need to use my savings?
Once these questions are answered, you can identify the account type that best accomplishes your goals. Generally, there are three types of accounts:
TAXABLE
TAX-ADVANTAGED
TRUST
We will explore each type below:
Taxable Accounts
A taxable account (often referred to as a brokerage account) is a type of account used to invest in securities like stocks, bonds or mutual funds. Savings deposited into these accounts are not taxable, but gains made on investments are taxable. Brokerage accounts are typically used for long-term savings.
Five types of taxable accounts are:
Individual:
You are the sole owner, and upon your death, the account will become part of your estate.
Joint Tenants with Rights of Survivorship
Two or more share ownership of the account. Upon death of either owner or party, the ownership interest of the account automatically passes to the surviving account owner(s).
Tenants in Common:
Two or more people share ownership of the account. Ownership interest does not automatically transfer to the surviving tenant(s) upon death of one of the account owners.
Community Property:
A community property account is owned by two married people and contains assets acquired during the marriage. Each spouse has equal ownership in the assets, and in the event of death or divorce the account is split between the two owners. Community property accounts are only allowed in certain states.
Custodial:
A custodial account is managed by an adult (not necessarily the child's parent) for the benefit of a minor child. When the minor reaches age 18 (or, in certain states, 21), he/she can take full control of the account.
Tax-Advantaged Accounts
The term “tax-advantaged” refers to any type of investment account that is either exempt from taxation, tax-deferred, or that offers other types of tax benefits. If your goal is to save for retirement and you do not expect to need the money before age 59½, an individual retirement account (IRA) should be considered.
IRAs can be set up by individuals and have unique tax-advantages not found in taxable accounts. Three common types of IRAs for individuals are traditional, Roth and rollover.
IRAs can be set up by individuals and have unique tax-advantages not found in taxable accounts. Three common types of IRAs for individuals are traditional, Roth and rollover.
Here's how they differ:
Traditional IRA:
Contributions are made in pre-tax dollars and along with investment earnings are not taxed until withdrawn from the account. You may be eligible for a tax deduction - consult your income tax advisor.
Roth IRA:
Contributions are made in after-tax dollars and qualified distributions can be withdrawn tax-free after a 5-year minimum investment and age 59½.
Rollover IRA:
Money held in a retirement plan sponsored by a former employer can be transferred tax free into an IRA (Traditional or Roth).
Comprehensive Wealth Management Solutions
| Accounts | Roth IRA | Traditional IRA |
|---|---|---|
| Taxes | • Contributions are not tax-deductible. • Earnings can grow tax-free. | • Contributions may be tax-deductible. • Earnings can grow tax-deferred. |
| Withdrawals | • After age 59½ and if the account has been open 5 years or more, earnings are tax- and penalty-free. • Distributions not required. | • After age 59½, withdrawals are penalty- free, but taxed as current income. • You must begin taking distributions at age 72. |
| Income limitations | • Income restrictions apply. | • Anyone with earned income can contribute to a traditional IRA. • Contributions may be tax-deductible. (consult your tax advisor) |
IRAs can also established by businesses. If you are self-employed or in a partnership, consider establishing a Simplified Employee Pension (SEP-IRA) or a Savings Incentive Match Plan for Employees (SIMPLE) IRA. Both account types are popular vehicles to save for retirement, however, there are a few differences to consider.
Are you self-employed?
If self-employed or a sole proprietor, a SEP-IRA is easy to open and maintain and allows the account holder to make contributions for themselves or their spouse (based on eligibility). Contributions are tax-deductible and earnings not taxed until withdrawn.
You must be self-employed (a person who, individually or with a spouse, owns 100% of an unincorporated business), who has no employees other than a spouse, who is included in the SEP-IRA.
You must be a partner in a partnership, and the SEP-IRA plan includes only partners or their spouses.
You must be the sole shareholder of a corporation (a person who, individually or with a spouse, owns 100% of the corporation), who has no employees other than a spouse, who is included in the SEP-IRA.
You must be the spouse of a person described in the above scenarios.
Do you own a small business with fewer than 100 employees?
If self-employed or own a business with 100 or fewer employees, you may be eligible to establish a SIMPLE IRA. Generally, the company must include all employees age 21 and over if they received at least $5,000 in compensation during any two prior years and can reasonably expect to receive at least $5,000 in the current year. Companies maintaining another employer-sponsored retirement plan in the same year are not eligible.
The client must already have a SIMPLE IRA master plan at Schwab. The client must provide their employer's name, address, and group ID (master account) number as part of the online enrollment process. An employer that does not have an employer's group ID will first need to establish a plan prior to the employee's opening a SIMPLE IRA with Institutional Intelligent Portfolios.
Consult your tax advisor for the type of account you should establish.
The client must already have a SIMPLE IRA master plan at Schwab. The client must provide their employer's name, address, and group ID (master account) number as part of the online enrollment process. An employer that does not have an employer's group ID will first need to establish a plan prior to the employee's opening a SIMPLE IRA with Institutional Intelligent Portfolios.
Consult your tax advisor for the type of account you should establish.
Trust Accounts
Is the money you are investing intended for someone other than yourself? If creating an account with the primary purpose of passing a legacy on to someone after you die, consider a revocable living trust. A revocable living trust is a legal arrangement that places assets in trust for the benefit of the account holder during their lifetime (hence revocable) and specifies where the assets will go after their death. Also, a revocable living trust can assist individuals with avoiding probate.
Consult your legal advisor on whether this account type is right for you.
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