In simple terms, an investment account is an account designed to keep track of the assets of clients (usually individuals). Investment accounts can be opened by a client in an investment or management company on the basis of a trust management agreement.
Common types of investment accounts
- USA – Individual Retirement Accounts (IRA);
- Canada – Registered Retirement Savings Plans (RRSP);
- Australia – Retirement Savings Accounts (RSAs);
- UK – Individual Savings Accounts (ISA);
- Japan – Nippon ISA (NISA) – literally, Japanese Individual Savings Accounts.
Why does the state need such an account? One can get the following answer: “It is necessary to provide companies with cheap money.” After all, it is no secret that the population keeps their savings in banks, and for business, this money costs as much as loans in these banks. And this is a lot. It is much cheaper to get this money directly bypassing the bank, so the government’s task is to attract a domestic investor.
Therefore, the presence of such a mechanism as investment accounts should shift the point of view of the population, when choosing instruments for saving, towards the stock market. That, in turn, will raise the demand for securities, and if there is demand, then there will be market growth.
Investment accounts: features
Let’s take a look at the common features of investment accounts:
- The key point is the possibility of obtaining tax incentives (deductions) for investors;
- An investment account has no restrictions on the age and labor status of both individuals and legal entities. The main thing is to be a US taxpayer;
- The contribution limit is $6,000 if you’re under age 50 or $7,000 if you’re age 50 or older. (The minimum contribution has not been established);
- To take advantage of the tax deduction, you must have an open account for at least 3 years;
- If a person decides to partially or completely withdraw funds from the account, then this will entail the closure of the account and the need to return the tax deductions received earlier;
- If the owner of the account dies, then the funds are inherited without paying taxes.
How and where to invest using investment accounts
Investment instruments for an investment account are prescribed in an agreement with your brokerage company.
You will be able to invest in different assets with different levels of risk, for example:
- Bonds are an instrument with minimal risks and a fixed (not high) yield. By the way, income on government bonds is not subject to personal income tax;
- Mutual funds are an instrument of average profitability and risks; it is best to start with open-ended index mutual funds;
- Eurobonds – an instrument denominated in foreign currency;
- Stocks – good returns and high risks, knowledge is required to manage this asset;
- Futures and options – it is better not to use this tool without good knowledge.
How to open an investment account
If you want to open an investment account, then it is worth contacting large brokers that have a wide branch network or banks that have subdivisions engaged in asset management, they usually provide investment in mutual funds.
Most likely, there will be other companies that want to get their piece of this pie and also join the race to open an investment account, so there will be plenty to choose from.
As a rule, almost every company provides the opportunity to either trade independently on the stock market, or ready-made investment products or strategies with different levels of possible profitability and risk (these parameters may not be declared at all). But for the most part, finished products can be roughly divided into the following groups:
- Conservative – investments in federal loan bonds;
- Moderate – investments in bonds of the largest US corporations;
- Aggressive – investments in shares of the largest US companies;
- Funds – investments in mutual funds of bonds, shares;
- Structural – investments in options + bonds.
When opening an investment account, you should remember the following points:
- Only one investment account can be opened for each person. In case of opening several accounts with different brokerage companies, there is a risk of denial of tax deduction;
- You cannot assign the status of an investment account to previously opened trading accounts with brokerage companies;
- If you withdraw partially or completely funds from the account before the expiration of 3 years, be prepared to terminate the contract, and return the deductions and pay taxes;
- The date of the account opening through the brokerage company is the date of the agreement conclusion. The date of opening an investment account with the management company is the date the funds are deposited into the account;
- Investment accounts can be transferred from one brokerage company to another, you can even change their type, while retaining the possibility of obtaining a tax deduction;
- When using such an account, you cannot trade on the Forex market;
- The frequency of replenishment of an investment account is not regulated and allows the investor to deposit funds at any time, as well as not deposit them at all;
- Income in the form of dividends from such an account can be withdrawn to any closed accounts;
Finally, let’s go over the main pros and cons of an investment account.
Pros of investment accounts
- Ability to choose one of two types of tax deduction;
- Ability to own the account throughout life;Investment accounts can be a great addition to your bank deposit, especially for those who have not yet discovered the world of investment;
- An investment account can be used as a tool for retirement savings or for savings for expensive purposes (real estate, children’s education, financial freedom);
- Free movement of investment accounts between companies, types of contracts (brokerage services, trust management) and types of taxation (with some reservations).
Cons of investment accounts
- Lack of guarantees from the state, i. e. investments are not (yet) insured;
- The relatively small maximum amount of annual contributions hinders serious investment;
- Investments (so far) only in the domestic stock market;
- Investing funds for a fairly long period (3 years);
- Weak profitability.
An investment account is an interesting product that can be suitable for almost all segments of the population. It is clear that investment accounts with an income of less than 20% per annum will definitely lose to bank deposits. Therefore, investors need to offer a product with the highest possible income and with a minimum commission.
With a significant influx of private investors, market growth can occur and those who invested earlier will receive a higher income.
Of course, an investment account is a very progressive product, and investors have a large number of opportunities to earn money within the framework of investment accounts. Hopefully, an investment account will be able to create a whole class of competent US investors.