Types of Investment Accounts: Pros, Cons & Examples

Best for:

• Investors and traders who want complete investment and withdrawal flexibility

Standard or taxable brokerage accounts are often considered the “default” account for investors. Anyone over 18 can open a taxable account and invest in a wide range of assets for different goals. 

Standard brokerage accounts can be full-service, self-directed, or robo-advised:

• Full-service brokers generally charge higher commissions. They provide research, advice, and personalized investment strategies. 
• Self-directed accounts come with fewer services but offer discounted rates. Like the name suggests, you have to do more yourself. 
• Robo-advisors automatically invest your money based on pre-determined algorithms. A cheaper alternative to full-service brokers, these do the work for you automatically. 

Standard brokerage accounts are generally unlimited. You can invest as much as you want, sell when you want, and withdraw your cash when you want. But they don’t come with special tax breaks like some other accounts do.

Pros of standard brokerage accounts

• Highly accessible
• No limits on contributions or withdrawals
• Self-directed, full-service, and robo-advisor accounts available

Cons of standard brokerage accounts

• No special tax breaks for interest, dividends, or capital gains
• Brokerage account fees and services vary

Best for:

• Employees looking to grow retirement savings

Employer-sponsored accounts carry unique tax advantages to help investors save for retirement. Most come in two types:

• Traditional accounts reduce your taxes today. You’ll pay taxes eventually — on your cash withdrawals during retirement — but your tax bracket is often lower after you stop working.
• Roth accounts don’t reduce your taxes today, but you won’t pay any income tax on your withdrawals during retirement.

Some employers also match your plan contributions up to a certain amount — essentially giving you free money toward your retirement savings.

So, what’s the downside? There are limits on how much you can contribute to these accounts ($22,500 in 2023). Plus, if you need to withdraw your money before you turn 59.5, you’ll likely pay applicable taxes plus a 10% early withdrawal fee. 

Pros of employer-sponsored accounts

• Tax-advantaged
• Gains are tax-deferred until you make withdrawals
• Some employers match contributions
• High contribution limits compared to other tax-advantaged accounts
• Catch-up contributions permitted

Cons of employer-sponsored accounts

• May charge high fees and/or commissions
• Strict annual contribution limits
• Not all employers offer plans or match contributions
• Matched funds may not vest (be yours) immediately

Best for: 

• Self-employed individuals and their spouses to maximize retirement savings

Self-employed 401(k)s — or solo 401(k)s — serve investors who work for themselves (and/or a spouse) and don’t have other employees. They provide the same tax-advantaged status and many of the same benefits as employer-sponsored accounts. 

Like conventional retirement accounts, solo 401(k)s come in Roth and traditional variants. You can also contribute — and deduct contributions on your taxes — as both employer and employee. In 2023, contributions are limited to $22,500 as employee and 25% of your net compensation as employer.  

Pros of self-employed retirement accounts

• Tax-advantaged
• Functions like a conventional 401(k)
• Contribute (and deduct contributions) as both employer and employee

Cons of self-employed retirement accounts

• Early withdrawals still incur a 10% penalty
• May be subject to eligibility requirements

Best for:

• Small business owners and employees to maximize retirement savings
• Investors who don’t have access to an employer-sponsored account
• Investors who want additional retirement account options

Individual retirement accounts (IRAs) are tax-advantaged brokerage accounts opened by individuals. To be eligible, you or your spouse simply need to earn taxable income. 

However, IRAs have strict contribution limits — just $6,500 per year, plus $1,000 for investors over 50. Roth IRAs also set income limits that vary by tax filing status. 

Pros of IRAs

• Tax-advantaged
• Choose between traditional and Roth IRAs
• Different versions available for self-employed or small business employees
• More control over your investments

Cons of IRAs

• Investors may only contribute earned (taxable) income
• May have smaller contribution limits than employer-sponsored accounts
• Roth IRAs impose income limits

Best for:

• People who want to return to school or fund their kids’ education

Education savings accounts let you invest in education for yourself and/or a beneficiary. You generally contribute after-tax dollars and avoid taxes on withdrawals used for eligible elementary, secondary, or college expenses. Unfortunately, education savings accounts can count against beneficiaries when schools issue student aid.

Note that education accounts aren’t made equally. For instance, 529 plans may set lifetime contribution limits by state, but accounts can be transferred. Coverdell accounts have income and annual contribution limits ($2,000 per beneficiary, per year) and funds can only be transferred under certain circumstances.

Pros of education savings accounts

• Some states deduct contributions on taxes
• Eligible withdrawals are tax-free
• 529s have high lifetime contribution limits and can be transferred

Cons of education savings accounts

• Contributions usually aren’t tax-deductible
• Fees can eat into returns
• Coverdells have income and contribution requirements

Best for: 

• People with high-deductible health insurance plans

Some health plans have high deductibles, meaning you have to pay more money out of your own pocket before your insurance kicks in to help. Health Savings Accounts (HSAs) give people with high deductibles of at least $1,400 per individual or $2,800 per family a tax break in saving for medical expenses. 

You can use HSAs to pay for eligible health care, dental, and vision expenses for you, your spouse, and qualifying dependents. HSAs come with 3 major tax advantages:

1. You can deduct your savings contributions
2. Your account grows tax-free
3. Your withdrawals for medical expenses aren’t taxed either

As of 2023, HSAs permit contributions up to $3,850 for individuals and $7,750 for families, with an extra $1,000 permitted for individuals over 50. Your extra funds roll over each year. Withdrawals are also tax-free as long as the funds are used for qualifying medical, dental, or vision expenses.

Pros of HSAs

• Tax-advantaged
• No required time limit on withdrawals
• Withdrawals aren’t taxed when funds pay for qualified expenses
• Can be used on a wide range of medical expenses

Cons of HSAs

• Low contribution limits
• Only available if you have a high-deductible health plan
• Using money for non-approved expenses carries a 20% fee
• Can’t usually be spent on insurance premiums