Which Retirement Accounts and Investment Accounts Do You Need? – [Review]

People pursue more than one goal when they invest. Some may prioritize growing a home down payment, others might want to focus on building college funds for their kids, and everybody needs to be saving for retirement. Whatever the goal, there’s always one common denominator: building wealth.

Investment accounts and retirement accounts your key tools for building wealth. Getting to know all your options when it comes to investment and retirement accounts is your first job when it comes to your personal finance journey. This primer provides and overview of all the major account types, and should help you determine which are right for you and your goals.

Taxable Brokerage Accounts
Eligibility: These investment accounts are available to anyone 18 years of age or older. Legal adults can open custodial brokerage accounts for investors under 18.
Investment Options: It depends on your account provider, but generally you can invest in securities like stocks, bonds, exchange-traded funds (ETFs), and mutual funds.
You can invest on your own with a traditional brokerage account. Brokerage accounts are referred to as taxable investment accounts because they lack the special tax advantages of certain retirement account types, such as a 401(k) or an individual retirement account (IRA). There are two main types of taxable brokerage accounts: cash accounts and margin accounts.

Cash Accounts
A cash account is probably the type of investment account you think of when you think about investing. You deposit money into a cash brokerage account, and then you use the funds to buy securities.

Cash accounts can meet the needs of most investors, but they do have certain limits that may be unappealing to more advanced investors. You need a different type of brokerage account to trade on margin or short stocks.

Margin Accounts
Margin accounts work the same as cash accounts, with two big advantages. They allow you to borrow money from your bank or brokerage to buy securities, a process called buying on margin, and they enable you to short trade, a risky speculative form of investing in which you bet on stocks and funds losing value—instead of gaining it.

In margin trading, margin accounts let you leverage your money with margin loans, which can effectively double the amount of securities you can buy. The cash and securities in your account serve as collateral for the loans, and you pay interest. Because you’re dealing with borrowed money, margin investing opens you up to much steeper losses than cash investing.

In the worst case scenario, if an investment made on margin dropped in value to zero, you’d lose all of your money and then still owe your lender what you borrowed plus interest. For this reason, only advanced investors should pursue margin trading.