In investing, having the right broker on your side can make a huge difference. But you also need to know what type of brokerage account will best meet your needs. With so many financial goals to keep track of, one type of brokerage account can be a lot better for certain purposes than others. Let's take a look at the various types of brokerage accounts that can help you reach your goals.
Brokerage accounts for individuals
Even if you're opening a regular brokerage account just for yourself, you have a number of options to choose from. Specifically, one of the most important considerations is whether you want to name someone to receive your brokerage account assets automatically upon your death.
If you simply open a regular taxable brokerage account in your name, then your will determines who will receive the account assets. But if you use what's called a payable-on-death brokerage account, you'll name a specific beneficiary to receive those assets. Even if your will says something different, the name on your payable-on-death brokerage account controls who gets the funds. As a result, it's important to make changes as necessary if you decide you want someone else to inherit your brokerage account.
Brokerage accounts for couples
Couples have several options for brokerage accounts. The primary decision that you need to make is whether you want to hold your brokerage accounts as tenants in common or in joint tenancy.
With both of these types of brokerage accounts, each person on the account generally has the right to make transactions, including buying and selling stocks and making deposits and withdrawals. Where they differ, though, is in who receives the brokerage account if one member of the couple dies. With tenants in common, each person on the account is treated as owning one-half of the assets, and that person's will determines who will inherit that share of the account assets. As a result, after one person on the account dies, the other could find that a new third person has rights to the brokerage account.
With a joint tenancy brokerage account, when one account holder dies, the other automatically takes control of the whole account. That's true regardless of whether provisions of a will specify otherwise.
Brokerage accounts for children
Children under the age of 18 typically don't have the legal right to manage their own finances, so special brokerage accounts are usually necessary to hold children's assets. A custodial brokerage account is the most common type used, with a parent or guardian named to hold the brokerage account assets as custodian for the child.
Custodial brokerage accounts give the named adult the right to manage the account assets. When the child reaches the legal age of adulthood, typically 18, then the child has the sole right to take those assets. Many parents aren't comfortable with that possibility, and so they may hold assets in their own brokerage accounts in order to keep control.
Specialized brokerage accounts
Brokerage accounts also come in various flavors to meet certain needs. In particular, various types of tax-favored savings provisions have led to special brokerage account types being created. They include:
- An IRA brokerage account. IRAs are held by a financial institution for the benefit of the account holder.
- A 401(k) brokerage account. Most 401(k) workplace retirement plans are invested solely in mutual funds, but occasionally, you'll find a 401(k) that gives you access to a brokerage account in which you can buy and sell stocks, bonds, and other securities. Check with your employer to see whether you can open a 401(k) brokerage account.
- Health savings accounts. Some brokers allow you to open an HSA brokerage account to take advantage of favorable provisions for those with high-deductible health-insurance plans.
- College savings. Both 529 plans and Coverdell Education Savings Accounts have tax advantages compared to keeping money in a custodial brokerage account, although 529 plans come with substantial limitations, as well. Each state has at least one 529 plan, associated with particular financial institutions, while you can get a Coverdell brokerage account at a wider range of brokers.
- Trusts and business accounts. A special brokerage account is necessary for trusts and business entities, with some brokers not offering every possible option. It's important to keep trust and business assets separate from your individual assets, so check with your broker to make sure that you can set up an appropriate account.
With so many different types available, figuring out the right brokerage account for you can be a challenge. With some effort, though, you'll make sure that the brokerage account you choose will get the job done.
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