Account Types Basics

When it comes to stock market investing there three main categories to understand: Account Types, Tax Status and Investment Types.

Account types

While there are many account types, the 3 most commonly use types are 401K’s, IRA’s and Taxable Brokerage Account.

401K’s are retirement accounts provided through an employer and can only be accessed through an employer. There are annual contribution limit that change each year. For 2024 the contribution limit for those under 50 yrs old is $23,000 and $30,500 for those older than 50 yrs old. Since this is a retirement account funds can’t be accessed until you’re 59 1/2 years old, if accessed before this age there are hefty penalties you will have to pay.
IRA’s (Individual Retirement Accounts) are retirement accounts that any individual with taxable income can have outside of an employer. Like 401K’s there are annual contribution limits that change each year. For 2024 the contribution limit for those under 50 yrs old is $7,000 and $8,000 for those older than 50 yrs old. Like a 401K since this a retirement account fund can’t be accessed until you’re 59 1/2 yrs old, if accessed before this age there are hefty penalties you will have to pay. There is one caveat for Roth IRA’s where your contributions, not the growth from investments, could be accessed before 59 1/2 yrs old without penalties.
Taxable Brokerage accounts are arguably the most versatile investment accounts available. These accounts are not tied to an employer or retirement parameters. There’s no contribution limits or age requirements to access your funds. Now this freedom comes at the expense of not having any preferential tax benefits.

There are three main Tax Statuses investment accounts have: Tax Deferred (also called Tax Preferred), ROTH and Fully Taxable.

Tax Deferred (or Tax Preferred) is a tax status for 401K’s and IRA’s. A tax deferred 401K and IRA will be called a Traditional 401K and Traditional IRA. In both instances the money you contribute to these accounts will not be subject to personal income tax so you get an upfront tax benefit at the contribution. When the money is withdrawn in retirement that is when you will pay income tax on what you withdraw that tax year.
ROTH is an incredibly powerful tax status for 401K’s and IRA’s. For ROTH accounts you contribute money into the account you pay taxes not the contribution but after that the money grows tax free and there is no additional income tax at withdrawal. This is so powerful because you can pay taxed once upfront and then let the money grow invested for multiple decades tax free with no additional taxed at withdrawal.
Fully Taxable is an account with no tax beneficial treatments like a Tax Deferred or ROTH account. The money put into the account will have already had income tax and all capital gains or dividend income made will be subject to income tax. This account provides the most flexibility at the expense of paying taxes.

These are the types of investments purchased within an account.

ETF (Exchange Traded Fund) is a fund that is a group of many stocks bundles together to create a diversified fund. These funds trade during regular trading hours just like a single stock and are purchased in stock shares.
Mutual Funds are just like ETF’s except they only trade once a day at the end of market hours and are purchased in dollar amounts. Generally ETF’s have less transaction cost compared to a Mutual Fund.
Single stock are purchase shares in an individual compares like Apple, Home Depot, Nike or Ford.