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11 Best Investment Account Types for Young Investors [2022]

When choosing from the best types of investment accounts for young investors to open, you should consider when and how you plan to use the money (education, retirement, etc.) and whether they are qualifying or non-qualifying investments. 

Qualifying investments have tax advantages (such as being tax-deferred or tax-exempt), but they also usually have limitations on eligibility, contribution amounts, and when you can take out money. 

Non-qualifying investments are made with after-tax money. Any adult can contribute to non-qualified accounts, without limits, and the money is liquid and easy to add and remove from accounts. Returns, such as gains or interest, face taxes on an annual basis. 

These are 11 best types of investment accounts for young investors:

Taxable

  • Individual (or Joint) Brokerage Account
  • Money Market Fund (Cash Equivalents)

Retirement Plans (come as Traditional and Roth options)

  • 401(k)
  • 403(b) and 457
  • Individual Retirement Account (IRA)
  • SIMPLE IRA
  • SEP IRA

Non-Retirement, Tax-Advantaged Plans

  • Health Savings Account (HSA)
  • Flexible Spending Account (FSA)
  • 529 Savings Account
  • Coverdell Education Savings Account

Below are some of the most popular investment accounts and essential information to know if you’re considering opening them.

Taxable Accounts


man sitting at laptop thinking medium

1. Brokerage Accounts


  • Max Contribution: No limit
  • Withdrawal Rules: No restrictions unless enforced by broker; must pay taxes on capital gains or taxable distributions
  • Mandatory Withdrawals: No rules

An individual brokerage account is one of the most basic and flexible types of investment accounts you can open. With brokerage accounts, you can buy and sell investment vehicles, such as stocks, bonds, mutual funds and options, through a licensed broker with very few restrictions. 

Eligibility requirements include being a legal adult with a Social Security number or tax ID number. However, you can also open a custodial brokerage account to allow teenage investing.

Many of these come as all-in-one apps with debit cards for kids or banking apps for minors. These money apps for kids empower them to learn about money from an early age and how to manage their own money.

Most investors over the age of 18 open a cash account that lets you buy investments with money you have deposited. It’s also possible to open a margin account where you borrow money from the broker to purchase investments.

This type of investing carries higher risks and is not meant for beginner investors.

You can either have an individual taxable brokerage account where you retain sole ownership of the account and responsibility for necessary taxes, or a joint taxable brokerage account. 

Joint accounts can be shared by two or more people. These are usually spouses, but it can be with anyone, even those who aren’t related to you.

There aren’t any limits to how much money you can contribute to a taxable brokerage account. Your money is liquid and can be withdrawn at any time (although you’ll need to pay taxes on any capital gains or income distributions). 

The amount you’re taxed on your profits depends on your income level and whether it was a long-term or short-term investment.

As far as which brokerage to invest with, my top recommendation is Webull. They have no deposit minimums and zero commissions. Further, Webull comes equipped with useful stock research tools and an active investing community for further discussion and analysis.

Webull makes it simple to diversify your portfolio with stocks, options, ETFs and ADRs. You can invest through the free stock trading app or on a desktop. 

Investors receive free stocks for opening an account and making an initial deposit of $100 or more. 

For convenience, you can also open an individual retirement account through Webull. If you already have a brokerage account elsewhere, they will reimburse your transfer fees up to $100.

 

2. Money Market Fund (Cash Equivalents)


  • Max Contribution: No limit
  • Withdrawal Rules: No restrictions unless enforced by broker; must pay taxes on capital gains or taxable distributions
  • Mandatory Withdrawals: No rules

A money market fund (not to be confused with money market accounts) is a mutual fund that invests only in cash and cash equivalent securities. These are liquid, short-term investments with high credit quality, including:

Like other mutual funds, money market funds issue redeemable shares to investors and must follow the SEC’s guidelines. These funds are generally considered safe investments

Money market funds have relatively low initial investment requirements and shares can be bought and sold at any time.

There are taxable money market funds and ones that are tax-free. With a taxable fund, any returns are typically subject to standard state and federal taxes. 

There are far more options for taxable funds than tax-free funds. Tax-free funds invest in short-term debt obligations issued by federally tax-exempt entities. These carry lower yields to account for their tax advantages, making them more attractive to high income earners. 

Retirement Accounts


evaluating investments

While retirement may seem far away and these accounts may not be your top priority, starting early always acts as a smart decision because building wealth reliably requires time. As such, the time spent in retirement investments becomes extremely important

One of the most significant factors that help retirement savings increase in value over long periods of time is compound interest.  This acts by having your money generate interest on itself. In other words, your returns earn returns.

The more time this process has to work, the more your savings will grow. 

People often believe their cost of living in retirement will be substantially lower than during their working years. However, while some expenses go down, others, such as healthcare costs, go up. 

Therefore, you may require far more money in retirement than you realize. To meet this challenge, consider starting at least one type of retirement account covered below as early as possible. It may save you considerable stress and uncertainty when the time to retire finally comes.

3. 401(k)


  • Max Contribution (2021): $19,500 + $6,500 (catch-up contribution eligible) for individual; $57,000 total between individual + employer annually
  • Withdrawal Rules (2021): Money withdrawn before age 59.5 has a 10% additional tax
  • Mandatory Withdrawals (2021): Must begin withdrawing by 72 to avoid penalties

You likely already know a bit about how a 401(k) works and may have one of your own. In brief, these act as company-sponsored accounts provided by some employers. They work by having you designate a percentage of your income (from each paycheck) to contribute throughout the year. 

This amount automatically deducts from your pay and then transfers to a brokerage account which invests for you based on your pre-selected investment decisions. Most employers offer their employees target date retirement funds as Qualified Default Investment Alternatives (QDIA)

This type of investment asset provides a portfolio of underlying holdings which take into account the individual’s targeted retirement date and invests accordingly. 

This considers an investor’s risk suitability, meaning the portfolio holds a risk-appropriate investment mix in line with a person’s progress toward retirement.

In general, the sooner a person’s anticipated retirement date, the higher skew towards debt instruments and less equities held in the portfolio.  The reasoning here being that debt acts as an income-generating investment and also preserves capital better than stocks. 

The higher volatility seen in stocks can cause timing concerns as the retiree may need to tap into the retirement assets for their cost of living.

When considering whether to invest your retirement dollars in these assets, know the best target date funds have low expense ratios and transition “through” retirement and not “to” retirement.

  For a better understanding of these differences, look at the two charts shown below.  Target date funds which transition “through” retirement to shift their holdings as part of a glide path toward a more conservative mix, even after retirement age.

“Through” Target Date Retirement Fund Example


target date fund through retirement

“To” Target Date Retirement Fund Example


target date fund to retirement exampleThis allows the retiree to hold more money in the stock market for longer, potentially leading to higher portfolio returns.  This higher final asset base might provide for more financial security as people age.  

For millennials, this higher equity allocation might be necessary to grow our wealth (or even possibly generational wealth) to overcome the lower lifetime earnings we can expect as well as account for our longer average expected life spans.

For contributing money to this taxable account, you can receive a tax deduction on your income now and pay taxes on the contributions later. Alternatively, if your employer offers a Roth 401(k) option, you can pay taxes now and withdraw your money tax free in retirement. 

Remember, you have a max contribution you can make each year you have access to make contributions to the plan. In 2020, the figure stands at $19,500, but this regularly indexes for inflation. 

Also, any money you withdraw before age 59.5 from a traditional 401(k) comes with a penalty of 10% unless you withdraw for qualified reasons. You can also explore taking a 401(k) plan loan should you need temporary, early access to these funds. 

Of note on a traditional 401(k) plan, you will need to begin taking required minimum distributions (RMDs) at age 72. Therefore, if you haven’t already started, you need to begin withdrawing to avoid penalties.

The most valuable benefit of a 401(k) is the match programs many employers provide. In this situation, your company agrees to match your contribution up to a certain percentage. 

One popular example is companies matching 50% of the first 6% you contribute (making a total of 9%). It’s always recommended to “max out” your 401(k) contributions if you can afford it.

4. 403(b) & 457 Plans


  • Max Contribution (2021): $19,500 + $6,500 (catch-up contribution eligible) for individual; $57,000 total between individual + employer annually
  • Withdrawal Rules (2021): Money withdrawn before age 59.5 has a 10% additional tax
  • Mandatory Withdrawals (2021): Must begin withdrawing by 72 to avoid penalties

A 403(b) plan is the equivalent of a 401(k) for people who work at non-profit, tax-exempt businesses. Contributions are tax-deferred, meaning you pay taxes at the date of withdrawal and not upfront at contribution, but tax rules and contribution limits apply. 

For government employees, 457 plans are their versions of 401(k)s. In addition to the usual benefits, some employers also allow double contributions to 457 plans when an employee is within three years of the plan’s customary retirement age. 

Employers are permitted to offer a 401(k) or 403(b) as well as a 457 plan. In this situation, you’re allowed to fund both. Early withdrawals from 457 plans are subject to taxes, but they don’t have any extra penalties.

5a. Traditional Individual Retirement Account (IRA)


  • Max Contribution (2021): $6,000 + $1,000 (catch-up contribution eligible) for individual
  • Withdrawal Rules (2021): Money withdrawn before age 59.5 has a 10% additional tax
  • Mandatory Withdrawals (2021): Must begin withdrawing by 72 to avoid penalties

A traditional individual retirement account (IRA) allows you to contribute direct, pre-tax income towards investments that can grow tax-deferred. These accounts use pre-tax income similarly to how corporate 401(k)s work. When you withdraw (after age 59.5), you pay taxes on the money. 

Contributions are often tax-deductible based on one’s income, tax-filing status, and more factors. When it counts as a tax deduction, the IRS does not apply income tax to those earnings. 

These accounts can be opened through a broker (including an online one like Webull or a robo-advisor like M1 Finance) or with a financial advisor. 

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