Whether you’re new to investing or looking to optimize your portfolio, choosing the right investment account is key to reaching your financial goals. From flexible brokerage accounts to tax-advantaged retirement plans, each option serves a specific purpose, depending on your timeline and risk tolerance.
This guide breaks down popular investment accounts — like robo-advisors, custodial accounts and CDs — to help you decide which one fits your needs.
Brokerage accounts are well-suited for those looking to build diversified portfolios, whether for short-term trading or long-term wealth growth. Unlike tax-advantaged accounts, brokerage accounts have no restrictions on how much money you can deposit or when you can withdraw it, allowing you to maintain full control of your investments at all times.
This freedom, however, comes with added responsibility — managing a brokerage account often requires time and effort, as you’ll need to research and choose investments, monitor performance and rebalance your portfolio as needed.
Additionally, profits from brokerage accounts are subject to taxes — investors should also be aware of fees, such as trading commissions, account maintenance charges or advisory fees, which can add up over time.
Brokerage accounts are best used when seeking broad flexibility in investment options or when targeting financial goals that don’t align with the contribution limits or restrictions of retirement-specific accounts.
Robo-advisors use algorithms to create and manage diversified investment portfolios based on your financial goals, risk tolerance and time frame. By automating much of the process, robo-advisors are ideal for individuals who prefer simplicity or lack the expertise to build a portfolio themselves.
Most platforms charge lower fees than traditional financial advisors, often offering management fees as low as 0.25% annually. They also eliminate the need for constant decision-making, as the platform automatically rebalances your portfolio and reinvests dividends.
However, this convenience comes with some limitations. Robo-advisors typically offer less customization and may not cater well to investors with complex financial needs or preferences for specific asset classes.
Robo-advisors are best suited for investors with smaller portfolios or those who value convenience over control. While they provide a cost-effective solution for beginners, more advanced investors may prefer the flexibility of brokerage accounts or personalized advice from financial planners to align investments with their broader financial strategy.
Certificates of deposit (CDs) are a low-risk investment option offered by banks and credit unions. With a CD, you agree to lock your money away for a specific period — ranging from a few months to several years — in exchange for a fixed interest rate.
This predictable return makes CDs an attractive choice for conservative investors or those seeking to preserve their capital. They are typically insured by the FDIC or NCUA, meaning your principal investment is protected up to $250,000 per institution.
Additionally, the fixed interest rates provide certainty, regardless of market fluctuations. However, this stability comes with drawbacks. CD rates are often lower than the potential returns from stocks or other investment options, which means your money may not grow as quickly. Early withdrawals from a CD usually result in penalties, reducing the overall return if you need access to your funds before the term ends.
CDs are well-suited for investors with short- to medium-term financial goals who can afford to leave their money untouched for the term’s duration.
Money market accounts (MMAs) are a type of savings account that typically offers higher interest rates than traditional savings accounts while providing more flexibility for accessing funds. They are often seen as a middle ground between high-liquidity savings accounts and longer-term investments like certificates of deposit.
MMAs allow account holders to earn interest while still offering limited checkwriting and debit card privileges. Like standard savings accounts, they are usually insured by the FDIC or NCUA up to $250,000 per depositor. These factors make them a secure option for individuals looking to maintain liquidity without sacrificing all potential returns.
However, their interest rates, while higher than basic savings accounts, are often lower than returns offered by more aggressive investment options like stocks or mutual funds.
Money market accounts also limit the number of withdrawals or transfers you can make in a statement period, typically capped at six. This aspect of MMAs may not suit individuals who need frequent access to their funds. Additionally, some MMAs require higher minimum balances to open or maintain the account, which can be a barrier for smaller savers.
Overall, MMAs are best for investors seeking a low-risk way to earn modest interest while keeping funds accessible for short-term financial goals.
Retirement accounts, such as Individual Retirement Accounts (IRAs) and employer-sponsored 401(k) plans, are designed to help individuals save for their future while offering tax advantages.
Contributions to traditional IRAs and 401(k)s may be tax-deductible, and the investments grow tax-deferred until withdrawn in retirement. Alternatively, Roth IRAs and Roth 401(k)s allow contributions with after-tax dollars, offering tax-free growth and withdrawals in retirement.
One of the main advantages of retirement accounts is their potential for significant long-term growth due to tax benefits and compound interest. Employer-sponsored accounts like 401(k)s often include matching contributions, which provide an immediate boost to your savings. However, these accounts come with limitations, such as annual contribution caps set by the IRS and penalties for early withdrawals before the age of 59½.
Additionally, retirement accounts are primarily intended for long-term goals, making them less suitable for individuals who might need access to their funds in the short term. Choosing the right type of retirement account depends on your income, tax situation and retirement timeline. For example, Roth accounts may be ideal for those who expect to be in a higher tax bracket in retirement, while traditional accounts might suit those seeking immediate tax savings.
Pension plans, also known as defined benefit plans, are employer-sponsored retirement accounts that guarantee a specific payout upon retirement. These plans calculate benefits based on factors such as your salary history, years of service and age.
Unlike defined contribution plans such as 401(k)s, the employer bears the investment risk in a pension plan, making it a reliable option for retirees seeking predictable income.
Retirees receive regular payments, often for the remainder of their lives, which can provide financial stability and help cover essential living expenses. Additionally, some pensions offer spousal survivor benefits, adding an extra layer of security for families.
However, pension plans are becoming less common, especially in the private sector, as many employers have shifted toward defined contribution plans to reduce costs. Another significant drawback of pension plans is their lack of portability. If you leave a company before fully vesting, you may lose access to all or part of your benefits.
Furthermore, the stability of your pension depends on the financial health of your employer or the plan’s funding status, which could affect payouts over time.
Education accounts, such as 529 plans and Coverdell Education Savings Accounts (ESAs), are designed to help families save for future educational expenses while offering tax benefits. These accounts allow contributions to grow tax-free, and withdrawals are also tax-free if used for qualified education expenses, such as tuition, books or room and board.
A 529 plan is the most widely used education savings account due to its high contribution limits and flexibility. Funds can be used for K-12 education and higher education, making it a versatile choice for families. Coverdell ESAs, on the other hand, offer a smaller contribution limit but allow for a broader range of qualified expenses, including tutoring and school supplies for K-12 education.
The key drawback of education accounts is their limited use. If funds are withdrawn for non-educational purposes, they are subject to taxes and a 10% penalty on earnings. Additionally, these accounts may not be ideal for families who are unsure about their child’s future educational plans, as unused funds may require alternative strategies to avoid penalties.
Education accounts are best for families with clear educational savings goals and a long-term horizon, as the tax benefits and compounding growth can significantly reduce the financial burden of education costs.
Custodial accounts, such as UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts, allow adults to save and invest on behalf of a child until they reach the age of majority, typically 18 or 21, depending on state laws.
These accounts are commonly used to fund a child’s future expenses, such as education or first-time home purchases. Unlike education-specific accounts like 529 plans, custodial accounts can be used for any purpose once the child gains control.
Additionally, they offer access to a wide range of investment options, including stocks, bonds and mutual funds. However, custodial accounts are not tax-advantaged, and unearned income above a certain threshold may be subject to the “kiddie tax,” which applies the parent’s tax rate to the child’s investment earnings.
Another consideration is that once the child reaches the age of majority, they gain full ownership of the account and can use the funds as they wish. This lack of control over how the funds are spent may be a drawback for some parents.
Custodial accounts are a great option for families looking to transfer wealth or teach children about investing, but they require careful planning to maximize their benefits and minimize tax liabilities.
Health Savings Accounts (HSAs) are tax-advantaged accounts designed for individuals with high-deductible health plans (HDHPs) to save for medical expenses. These accounts offer a triple tax benefit: contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are also tax-free.
HSAs are unique in that any unused funds roll over from year to year, allowing account holders to build significant savings over time. Unlike flexible spending accounts (FSAs), which have “use-it-or-lose-it” rules, HSAs provide long-term flexibility. Additionally, once you reach age 65, you can withdraw funds for non-medical expenses without penalties, though they’ll be taxed as income.
However, HSAs are only available to those enrolled in HDHPs, and contribution limits are set annually by the IRS. While not ideal for everyone, HSAs can function as a supplemental retirement savings tool and are an excellent option for those looking to manage healthcare costs effectively.
Choosing an investment account starts with understanding what you’re saving for and how your financial situation aligns with the options available. Here are some important considerations to help narrow down your choices:
Investment accounts offer a range of advantages that can help you achieve your financial goals while growing your wealth. Some of the most notable benefits include:
While investment accounts offer many advantages, they also come with some drawbacks. Here are a few key limitations to keep in mind:
Investment accounts are a vital tool for building and managing wealth, whether you’re saving for retirement, education or other financial goals. By understanding the unique benefits and limitations of each account type, you can choose the one that best aligns with your objectives and risk tolerance.
Ready to take the next step? Explore your options and start growing your investments today.
For long-term growth, tax-advantaged accounts like IRAs or 401(k)s may be ideal. If you prioritize flexibility, a brokerage account allows access to a broad range of investments without restrictions on contributions or withdrawals. For those seeking safety and guaranteed returns, certificates of deposit or high-yield savings accounts may be a better fit.
Yes, you can have multiple accounts to meet different financial goals. For instance, you might use a 401(k) for retirement savings, a brokerage account for general investing and a 529 plan for a child’s education. Diversifying account types can help you take advantage of various benefits, such as tax advantages and flexibility.
Bonds, treasury securities, blue chip stocks, ETFs, REITs, CDs and annuities are some of the best investments for retirees.
Learn how to use Robinhood’s commission-free options trading platform to maximize your investment strategy despite market volatility.
You have to be 18 to legally start investing yourself, but teens can use investing apps with the help of their parents to start early.
Starting October 16, Robinhood Legend will become available to all Robinhood users for free. See what’s included in this new desktop platform.
24-hour stock trading is available from Robinhood, Interactive Brokers, Schwab and E*TRADE. Compare your options here.
SoFi’s Roth IRAs stand out for their low trading costs, access to both human and robo-advisory services and 1% IRA contribution match.
Check out the best investment newsletters to stay informed and find new opportunities.
Start your child on a path toward financial success with a Roth IRA for kids.
Some of the best ways to invest for kids include savings bonds, stocks, index funds, robo-advisors, custodial accounts and more.
Micro-investing apps like Opto, Robinhood, eToro, Acorns, Interactive Brokers, M1 Finance and more let you invest with as little as $1.