How choosing an account can help you reach your financial goal

YEREVAN, March 21, ARKA/. The market offers participants a string of services and instruments that suit different strategies. It is in the investor's interest to study all options and understand which one is the best  for his/her specific situation. At the same time, it is possible to choose a certain type of account, depending on financial goals. Some people, for example, seek to increase capital, while others want to ensure a decent pension. Let's find out what types of investment accounts exist and who they are suitable for.

Brokerage account 

In order to make transactions on the financial market and receive profit, an investor opens an account with a broker - a licensed company. If an ordinary account is used for storing funds, cash withdrawals and money transfers, a brokerage account is needed for trading assets. All transactions are made through a brokerage company. The broker buys assets on the client's order using money from the account and transfers funds from the sale to the same account. They can be withdrawn at any time or reinvested without the loss of interest that usually accompanies early closure of the deposit. 

There are several types of brokerage account:

- Primary - investments in securities and currencies are made through it;

- Futures - used for trading futures and options on the futures market;

- Over-the-counter - allows you to make transactions outside stock exchanges, directly or abroad.

Margin brokerage account

A margin account is an account that allows a client (trader) to borrow money and other financial assets from a broker to trade on financial markets. If the trader does not have enough money to make a trade, he or she can borrow it from the broker against a pledge of shares, which the broker always keeps with himself or herself. The broker monitors how the price of the client's assets changes. If it falls, the company has the right to sell the asset to guarantee compensation for the amount of the loan provided.

A margin account allows you to make profitable transactions that would be unavailable without additional funds from a broker. At the same time, it should be taken into account that applying for a loan to a broker is associated with great risk, because in case of failure, losses are likely to exceed the initial investment.

To clarify the mechanism, let's look at an example. Initially, an investor was given a million, and shares worth one and a half million were pledged. When the price of the asset approaches one million, the broker will sell it in order to return the loaned money and receive all the necessary commissions. In case the shares fall further, the client will incur losses.

A margin account is suitable for traders who, in particular, are engaged in active margin trading, know how to manage risks and one's emotions.

Savings Investment Accounts

Each country has its own peculiarities of the market and legislation. The specifics of investment in education, medicine and pensions are the result of these specifics. The following examples show the diversity of investment solutions.

U.S.

Education Investment Accounts

529 savings plans are tax-advantaged education accounts that any U.S. citizen starting at age 18 can open. They are sponsored by the government. The savings in the account can be used to pay for college and education up to 12th grade.

Coverdell ESA is another education investment savings account. It is suitable for paying for education at any stage. The account can be opened before the beneficiary child turns 18.

Health Savings Accounts (HSAs) are investment accounts that help cover the cost of health insurance

Health savings accounts (HSAs) are investment accounts that help cover the cost of health insurance. Savings can be invested in mutual funds, exchange-traded funds, and securities. Funds withdrawn from a health savings account are not subject to taxes or penalties. People who own health insurance with a high threshold contribution of at least $1400 are eligible to open HSAs.

Retirement Account Plans

A 401(k) is an investment retirement account into which employees in the United States can contribute a portion of their earnings before taxes. In this way, the amount of taxable income is reduced and savings are constantly increasing. In addition, they grow along with the market. You can withdraw the money after the age of 59.5 years. If you do it earlier, you will have to pay a penalty and taxes. The employer can also deduct funds to the account, independently determining the amount. They will be available after a certain amount of time worked in the company.

An IRA is an individual retirement account that provides tax benefits, the ability to invest and build retirement savings. There are two options: traditional and Roth.

- In the first case, the owner does not pay tax by depositing the funds, but the amount is subject to income tax at retirement. The annual limit on deposits is $6000. It rises to $7000 if the account owner turns 50 years old. A traditional IRA allows you to invest in a wide range of instruments, including stocks, bonds, various funds (ETFs, mutual funds) and allows you to seriously increase your retirement savings.

— Contributions to a Roth IRA are tax deductible, but no tax is due on withdrawals after age 59.5. There are income limits to qualify for this account.

Early withdrawal from an IRA requires payment of a penalty and taxes, just as for 401(k) owners.

Roth 401(k) - This savings account is essentially a combination of a Roth IRA and 401k.

You pay taxes before you contribute, but the funds are no longer taxed when you withdraw them. It is more difficult to withdraw funds from this type of account due to a number of additional requirements. You can withdraw money without penalty when you reach retirement age and provided the account was opened no earlier than 5 years ago.

A SEP IRA is an account through which self-employed individuals and small business owners can save for retirement. It provides tax-deferred contribution growth. SEP IRAs offer higher limits than traditional IRAs and a flexible deposit schedule. You can contribute money once or multiple times a year.

UK

ISA (Individual Savings Account) is a savings account.

There are 4 types of ISA:

1. Traditional Cash ISA savings deposit

2. Investment Stocks and Shares ISA, which allows you to invest in stock market instruments

3. Innovative Finance ISA - for investing in cryptocurrency trading

 4. Lifetime ISA - an account for retirement savings or a contribution towards the purchase of your first home. Notably, interest on the account and investment income are tax free. At the same time, the amount that can be contributed to the account during the year is limited - in 2023/24 - to 20 thousand pounds. It is possible to open more than one type of ISA and spread the contributions.

The account holder is a permanent resident of the UK or a civil servant on a business trip. Cash ISA is available to citizens from the age of 16, investment accounts Stocks and Shares ISA - from 18, Lifetime ISA - from 18 to 40.

However, it is not possible to open a deposit for another person. But there is a Junior option that allows parents or financial representatives of minors to open an account for them. From the age of 18, the child can manage the funds independently, and the Junior ISA type automatically transforms into an adult ISA.

The account holder has the right to withdraw money at any time. Fees depend on the terms and conditions of the financial organization in which they are held.

It is possible to transfer the account to another broker. Savings for the current year are not subject to commissions. The transfer of previously deposited funds may be accompanied by additional payments depending on the company's tariffs.

Russia

Individual Investment Account (IIA)

A special brokerage account with the help of which private investors invest in various financial instruments, thus reducing the amount of taxes and returning a part of expenses by deductions.

 There are some peculiarities to be taken into account.

- Benefits are available only if the money is kept in the account for at least three years. In the event of early withdrawal of funds, the funds received from deductions will also have to be returned.

- It is impossible to open more than one IIS, but it can be transferred to another broker.

- The investment limit for a calendar year is one million rubles.

- Tax benefits are divided into two types:

а. Deduction for contributions. The investor is refunded 13% of the amount contributed to the account during the year. The rate corresponds to income tax. The deduction can be received by all depositors, that is, it is not necessary to invest in securities. The maximum amount is 52 thousand rubles.

b. Deduction for investment income. A holder of an IIA is exempt from 13% tax on income from securities. When closing the account after at least three years, the broker does not charge a commission. The maximum amount of the deduction is not limited.

- The IIS owner can invest in shares, bonds, ready-made strategies, mutual and index funds.

- IIS is an optimal instrument for long-term investment in high-yielding assets.

- Savings on IIS, unlike funds on deposit and savings account, are not insured by the state.

Conclusion:

Investment account types differ in focus, accessibility, and mechanisms of use. They allow you to make transactions on the stock exchange, invest in education, provide pension and health insurance. For an investor when choosing, it is important, first of all, that the type of account correspond to specific financial goals and bring benefits.

The material was prepared within the framework of a joint project "The Year of Investing in Oneself" by ARKA, AMI Novosti-Armenia news agencies and Freedom Broker Armenia. 

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10:00 03/21/2024