Are You at Risk of a Big Investing Mistake This Year?

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  • There are different types of brokerage accounts, and choosing the wrong one can be costly.
  • You could lose thousands of dollars if you have your money in the wrong place.

There are some investing mistakes you can't afford to make.

Many people make mistakes when investing, and that's just a part of life. However, there's one huge error that can be difficult to recover from. The good news: It's easily avoidable.

Are you at risk of this big mistake that can end up costing you both now and in the future?

This investing mistake should be avoided at all costs

One of the single biggest investing mistakes you could make in 2022 is using the wrong type of brokerage account to buy assets.

There are different kinds of accounts you could open with most brokers, including:

  • Taxable brokerage accounts
  • Traditional IRAs
  • Self-employed IRAs
  • Roth IRAs

Not all brokers offer each type of account, with some popular brokerage firms providing access only to taxable accounts. But picking the wrong account type could end up costing you thousands of dollars both this year and over time. It can be hard to correct because switching accounts after you start investing could result in tax penalties -- if switching is even possible at all.

That's because these accounts have different rules for how taxes work, when and how much you can contribute to each one, and when you can withdraw money.

With a taxable brokerage account, for example, you can withdraw money whenever you want but you don't get any tax breaks for investing in it. You may also have to pay capital gains taxes if you make a profit on any of your investments within the account and then sell it.

Traditional IRAs and self-employed IRAs, on the other hand, provide you with the opportunity to make tax deductible contributions, potentially saving you hundreds or even thousands of dollars on your tax bill. You're limited in how much you can contribute each year, though. And your money can grow tax free with these retirement accounts, although you pay taxes on withdrawals.

Self-employed IRAs such as SEP and SIMPLE IRAs can provide higher contribution limits than traditional IRAs, but aren't open to everyone. Roth IRAs offer deferred tax savings, as you don't get an upfront deduction for contributions but can take tax-free withdrawals.

While these tax-advantaged accounts come with generous tax breaks, they also come with restrictions on withdrawals, so they may not be the best option for those who are hoping to take money out soon. For example, you can’t usually take withdrawals from IRAs before age 59 1/2 without incurring a 10% penalty.

As you can see, there's a lot to think about when choosing between these accounts. Making the wrong choice could lead to missed tax breaks or tax penalties -- so you'll need to be smart about exploring your options.

How should you pick an investing account?

To avoid making a costly investing mistake, you should ask yourself a few key questions and take time to carefully research which brokerage account is a better fit for your needs. Consider:

  • What will the invested money be used for? If it's not for retirement, a taxable brokerage account may be best -- but if you'll use the money as a senior, then you should look for an account offering tax advantages.
  • What are the account eligibility rules? For example, IRAs have rules regarding how much can be contributed each year, or if you can make tax-advantaged contributions at all based on your income.
  • Are you better off deferring tax savings? If you expect to be in a higher tax bracket later, Roth IRAs could be a better option than traditional IRAs.

By taking the time to carefully consider your investing goals, you can pick the type of account that makes sense. Then you'll just need to find a brokerage firm offering your preferred account type and start trading.

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