What Type of Investment Account Should You Open?

Investing in the stock market is one way to pursue long-term financial goals, such as saving for retirement or building wealth over time. However, investing also involves risk, and the right approach depends on your financial circumstances, goals and tolerance for market fluctuations. Today, online investment platforms and robo-advisors offer a range of ways to invest, with different features, fees and levels of involvement. Here’s a look at some of the investment account options available to you.

A financial advisor can help you determine which types of investments are right for you. 

Types of Investment Accounts

Investment accounts come in several forms, each with different tax benefits, contribution rules and levels of flexibility. Some, including employer-sponsored retirement accounts and IRAs, offer tax advantages designed to encourage long-term savings. Others, such as taxable brokerage accounts, generally offer greater flexibility when it comes to accessing your money.

Another consideration is how your investments will be managed. Depending on the account and provider, you may be able to select and manage investments yourself or use a financial advisor or automated investing service. Your financial goals, investment experience, tax situation and willingness to pay management fees can all influence which approach makes sense for you.

Here are six investment account options to consider, along with how they work and whom they may suit.

1. Self-Directed Brokerage Account

The self-directed brokerage account is an investment account that gives you complete control of your portfolio. A brokerage firm serves as a custodian of your assets. You’re in charge of doing your own research and choosing your investments.

Note that this doesn’t necessarily mean you’re researching and choosing individual stocks. You can, for instance, fill your self-directed account with actively managed mutual funds, which means that a fund manager will be picking the stocks themselves. But it’s up to you which funds you want to put in your portfolio.

Online brokerages like Fidelity, Vanguard, Charles Schwab, and E*TRADE are big players in this space. But virtually all major brokerage firms offer a way to manually choose investments. Many online brokerages offer commission-free trading of U.S.-listed stocks and ETFs, although other fees may apply. When comparing providers, consider trading costs, investment choices, account minimums and the features available through their websites and mobile apps. How much you pay in fees can range from platform to platform, so make sure you do your homework.

Most people choose to manage their self-directed brokerage accounts online through the brokerage’s website. Most brokerages still allow you to make trades over the phone, though they’ll usually charge an extra fee.

In its most basic form, a self-directed brokerage account is a taxable account. This means there are no deductions or other tax advantages to the account. Any dividends paid out to you will be considered income; any securities you sell at a profit will be taxed as either income or capital gains.

2. Robo-Advisor Account

Robo-advisors offer automated investment management services that use software to build and maintain portfolios based on an investor’s financial goals and risk tolerance. Typically, it invests client assets in a variety of ETFs. The software automatically makes trades and rebalances each portfolio as needed.

When you open an account with a robo-advisor, you’ll answer a series of questions about your financial situation, your investing goals and how risk-averse you want to be with your investments. The robo-advisor will use your answers to tailor how it manages your portfolio.

Because robo-advisors manage clients’ assets digitally, they typically do not need human advisors. This significantly reduces the cost of robo-advisor services, which is part of why they’ve become so popular. One potential drawback is that automated services may offer less personalized financial planning than working directly with an advisor, although some platforms provide access to human professionals for an additional fee.

Robo-advisors have risen greatly in popularity since they first came on the scene following the 2008 financial crisis. Betterment, the first publicly available robo-advisor, now has more than $65 billion in assets under management. Wealthfront, Wealthsimple and Acorns are other top robo-advisors, and many traditional brokerage firms have started similar services.

Most robo-advisors offer tax-advantaged retirement accounts like IRAs. And if you open a taxable account, many will offer automated tax-loss harvesting to help minimize taxes.

3. Advisor-Managed Brokerage Account

This is the oldest type of investment account, as top financial advisors have been doing business with wealthy investors for about as long as the stock market has been around. If you open an account with a registered investment advisor (RIA), the advisor will manage and monitor your portfolio for you, typically charging a fee that’s a percentage of your assets under management.

Working with a financial advisor provides a few benefits. Advisors have expertise that can be difficult to obtain through independent research, and have special access to exclusive investment products. They also typically offer financial planning services that encompass your whole financial picture.

More comprehensive services come with a higher price tag, however. Investing with the help of an advisor is typically the most expensive way to invest. Many advisor firms have account minimums, and their services are generally targeted toward investors with either complex financial situations or hundreds of thousands of dollars to invest. If you’re a new investor and you’re only looking to test the waters of the stock market, this route most likely won’t be worth the cost.

4. 401(k)

A 401(k) plan is one of the most common types of defined contribution retirement plans. With a defined contribution plan, employees and sometimes their employers contribute money to an individual accounts established under the plan. The amount available in retirement depends on contributions and investment performance. This differs from a defined benefit plan, such as a pension, which generally promises a retirement benefit calculated according to a predetermined formula.

401(k) plans are employer-sponsored, so access generally depends on whether your employer offers one. One of their main benefits is their tax advantages. With a traditional 401(k), contributions are made with pre-tax dollars, reducing your taxable income for the year. Withdrawals are then generally taxed as ordinary income in retirement. Some employers also offer Roth 401(k) options, which are funded with after-tax dollars but allow qualified withdrawals to be made tax-free.

Your employer sets up the 401(k) plan, but you’re generally responsible for deciding how much of your paycheck to contribute and selecting investments from the options available. Some employers also match employee contributions up to a certain percentage of their salary. If your employer offers a match, contributing enough to receive the full amount can help you make the most of this retirement savings benefit.

5. Traditional IRA

An Individual Retirement Account (IRA) is a retirement account you open yourself. A traditional IRA allows you to invest for retirement while potentially receiving a tax deduction for your contributions. Whether you qualify for a deduction depends on your income, filing status and access to a workplace retirement plan. Investments within the account grow tax-deferred, with taxes generally due on withdrawals of previously untaxed amounts.

Within an IRA, you can invest in mutual funds, ETFs, stocks, bonds and other investments. Once you reach the age of 59 ½, you can take money out of your IRA without penalty, although it will be taxed as ordinary income.

With a 401(k), the tax deferral happens automatically, because your employer removes your contribution before the government taxes it. With an IRA, you’ll have to manually deduct your contributions when you file your taxes, assuming your modified adjusted gross income (MAGI) does not exceed thresholds set by the IRS.

There’s a limit imposed by the Internal Revenue Service on how much you can contribute to IRAs and deduct. In 2026, that limit is $7,500, or $8,600 if you’re age 50 or older. However, you may not be able to take a full deduction if you have a 401(k) or other workplace plan and your income exceeds certain levels.

6. Roth IRA

A Roth IRA differs from a traditional IRA in one key respect. Instead of contributing pre-tax dollars and paying income tax once you retire, you contribute after-tax dollars to your Roth IRA, but can then take tax-free income in retirement. This means you won’t be able to deduct your contributions from your taxable income.

While you miss out on a tax break during your working years, one advantage of a Roth IRA is that you can generally withdraw your original contributions without paying taxes or penalties. Investment earnings can also be withdrawn tax-free once you meet the requirements for a qualified distribution, including the five-year rule and generally reaching age 59 ½.

This can make Roth IRAs appealing to investors who expect to face higher tax rates in retirement, although the relative advantages of Roth and traditional IRAs depend on individual circumstances.

This also means that a Roth IRA is at its most valuable when you open it at a young age. If you allow more time for the earnings to compound, you’ll earn more tax-free money. Plus, if you contribute when your salary is lower, it means the tax you paid on those contributions will also be lower.

Your contributions are subject to the same annual contribution limits of $7,500 (or $8,600 for people 50 and older) that apply to traditional IRAs. And there are income limits on contributing regardless of whether you have a workplace plan. Single taxpayers will see their contribution limit start to phase out once their MAGI reaches $153,000. If your MAGI is $168,000 or more, you cannot make a direct Roth IRA contribution.

Tax Considerations When Choosing an Investment Account

Taxes influence how investment accounts work and how much of your money you get to keep over time. Some accounts reduce your taxable income today, while others focus on giving you tax-free growth or tax-free withdrawals later. Knowing how each type treats contributions, investment gains and distributions can guide your decision about where to place your savings.

A standard brokerage account doesn’t provide tax breaks, but it offers open access to your money. Interest, dividends and profits from selling investments can be taxable in the year they occur. In return for this lack of tax benefits, these accounts come with no contribution caps or withdrawal restrictions, which can be helpful for both near-term and long-term goals.

Accounts that delay taxes, including traditional IRAs and traditional 401(k)s, let you put in pre-tax dollars or claim a deduction if you qualify. Investments grow tax-deferred, with withdrawals of previously untaxed contributions and earnings generally subject to ordinary income tax. This setup may appeal to people who expect lower taxable income in their later years.

Roth-style accounts, such as Roth IRAs and Roth 401(k)s, work differently. Contributions are made with money that has already been taxed. Investment gains are not taxed along the way, and withdrawals that meet IRS rules come out tax-free. This can be attractive for those who believe they’ll face higher tax rates in the future.

Looking at these tax treatments side by side can help you decide which accounts support your financial goals. Many investors use a combination of taxable, tax-deferred and Roth accounts to create more flexibility when drawing income in retirement.

Bottom Line

Investment accounts differ in their tax treatment, fees, available investments and management options. Whether you’re considering a taxable brokerage account, an employer-sponsored 401(k) or an IRA, the right choice depends on your financial goals and how much control you want over your investments. Comparing these features and understanding the associated costs and restrictions can help you choose accounts that fit your financial situation.

Tips for Investing

• The idea of managing your own portfolio can be overwhelming but consider finding an expert, like a financial advisor, to help you. A financial advisor can help you find the right mix of assets for your investment account to help you achieve your goals.  Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• When it comes to protecting your portfolio against risk, achieving the right asset allocation is the most important thing you can do. By investing in several different asset classes and across different economic sectors, you’re not putting all your eggs in one basket. Investing in the right index fund or an exchange-traded fund (ETF) is an easy way to diversify your holdings.

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