Account Qualification

Question: I want to start investing but I don’t know how to take the first step?

Believe it or not the first step to investing is not finding an investment itself but the path to the investment. What type of investment account should you open? Let’s walk through the different investment accounts available and their different purposes.

Account Type: Traditional IRA, SEP IRA, Traditional 401k, 403b, 457 Plans.

These accounts typically will provide the investor a present day tax deduction. This can help an individual or family reduce their tax liability in the year the funds were placed in the account. Some of these accounts may allow contributions up until April 15th of the following tax year to help offset the tax year being prepared.

These accounts are best for high income individuals with a long term investment horizon. The purpose of the funds are for retirement purposes.You may be charged with taxes and penalties if you use these funds prior to age 59 and a half.

Account Type: Roth IRA, Roth 401k

Tax free growth. Let’s do that again only go to your window open it up, stick your head out and scream “TAX FREE GROWTH”. That feels good right. The downside is no current day benefit to you.

Roths are best served for those with lower incomes with hopes of being in a higher income tax bracket in the future. The funds, like the IRAs discussed above are intended for retirement purposes and should be held for extended periods of time. Penalties may be incurred for distributions prior to age 59 and a half.

Account Type: Non-qualified or Brokerage

Liquidity. These funds are readily accessible for investors at any point. This type of investment can be converted to cash at any point. The downside is taxes are owed each year for any capital gains, dividends, or other possible transactions.

These types of accounts are for those with intermediate to shorter investment timelines or may need access to capital.

Before you go looking for the perfect investment, you need to find the best account path to help maximize return. If you are unsure what type of account you should open ask yourself or your advisor these simple questions:

1. Will I need access to this money?
2. What is my goal for this investment?

These things should help you determine the best course of action. More information on various account types and benefits can be located here https://www.valuepenguin.com/investing/investment-account-types.

Make it a healthy, happy, profitable day.