Ready to open an investment account and start building for your future?


Now that this important decision is made, however, you may feel overwhelmed as to what kind of investment account you need, where to open it, and what exactly you’ll put in it. Bottom Up Wealth to the rescue!

When you begin to invest, retirement always comes first. No ifs, ands or buts!

There are loans for your children’s education (not ideal, but they’re an option).

You can continue to work for current income. Sometimes. The older you get, the more likely you are to have health problems that could keep you from making a living.

If you turn 65 and have $10,000 set aside for your retirement, you must either continue working or become a burden to your family and/or the government.

Or live in a refrigerator box.
I don’t want that for you, my friend.

Have you ever been on an airplane and watched the flight attendants do their spiel during takeoff? Put your own oxygen mask on, then assist those around you.

You can’t assist those around you if you’re passed out from lack of oxygen resources. Investing is the same way.

You must always look out for your future self, the one who may not be as healthy or able-bodied as your current self, before working on other financial goals. I cannot stress this enough!

Now that this rant that everyone is tired of hearing from me is out of the way, let’s take a look at all these different considerations for opening an investment account.

Choosing a brokerage company

Many new investors wonder if they should open their Roth IRA or other retirement account with their bank.

If you want to build wealth and not just set aside cash, you need an account at a brokerage firm.

Not a bank.

For retirement or college savings, your bank or credit union will not give you the investment options that will give you the growth you need to meet your goals. Unless you’re already retired with a high net worth, an IRA at your bank is pretty worthless.

I’ve researched and used many brokerages. They all serve the same purpose, which is to hold your stocks, bonds, mutual funds, index funds, and ETFs.

They all boil down to the same function: facilitating the purchase and sale of your investments and providing you “baskets” (accounts) to hold these investments.

Many new investors confuse an account with an investment. Your account will not make you money. The investments inside the account are what determine how much your money can grow. Learn more in 10 Steps to Start Investing.

Some brokerages provide extra tools and charts and bells and whistles. Some of the bells and whistles are handy, but what is the primary goal here? The goal is to maximize how much money you end up with.

When you’re building your wealth from the bottom up, cost is of utmost importance

Choosing your investing style

The beauty of the internet age is that literally, anyone can build wealth with some education, because you do not necessarily have to pay a broker or financial advisor hefty fees to buy and sell your investments.

Investing used to be only for the wealthy because you had to hire a living, breathing person to open your accounts and buy and sell your investments. Now, the cost to invest is low, because just about everything can be done online with a few clicks!

When you open your investment account, there are a few types of investment account you can open based on your investment style.

Self-directed investment account

This is the type I have my students open to choose and buy their own stocks. I teach Zero to Investor students who are eligible to open a self-directed Roth IRA, and how to buy their stocks within their Roth IRA.

It’s important to note that you DO have to select your investments within this type of investment account, or your money will sit in cash and earn nothing. Every time you buy or sell a stock or ETF with the account I recommend above, it costs a low flat fee of $4.95.

Compare that to the larger brokerages, which can be up to $9.99 each time you buy or sell, or worse, mutual funds that can charge you a load fee plus ongoing expense ratio. That $5 saved by using a low cost brokerage like Ally Invest can come to tens of thousands of dollars over a lifetime of investing, which is part of what I teach in Zero to Investor, the beginners course that teaches you how to buy your first shares of stock.

Robo-advised investment account

If you don’t know how to analyze a stock to know if it’s a good purchase, you should either enroll in Zero to Investor and let me teach you, or you should look into a robo-account, which will remove all the guesswork.

A robo-advised investment account will automatically invest your funds in low cost ETFs, and charges a low management fee. Compare that to an account that functions similarly, your 401k. The combined fees within your 401k can come to 2%, 3% or even higher.

These fees can add up to hundreds of thousands or even millions, which is covered in-depth in Retire Wealthy. If investing isn’t your thing, still no excuses not to make your money work!

Learn how James and Dawn each make their millions, and where they each lost millions to fees and poor performance in How Much Should You Contribute to Your 401k?

Type of investment account

There are a variety of different investment account types. As I mentioned above, retirement must always come first. If you’re one of the few who is all set for retirement because you started early or have a hefty pension, it may be time to move towards other investment goals. Go you!

If your retirement isn’t banging or even if it is but you’re not taking advantage of the tax advantages of retirement investment accounts, read on.

If you’re going the automated investment account route, you simply put money in the account and it’s invested for you.

If you choose the self-directed investment account, you will need to choose your own stocks, bonds, or funds. The difference between the various account types is who can open one, what they’ll be used for, and how they’re taxed.

Retirement Accounts

There are dozens of retirement account types, all with separate sets of rules. Here I’ll give a brief overview of the ones I suggest to start with.

As always, you’ll need to assess your personal financial situation before making investment decisions. You can read Bottom Up Wealth’s full disclaimer here.

Roth IRA

I firmly believe every single person should have this type of investment account if they’re eligible. If you’ve ever visited Bottom Up Wealth before, you’ve heard me say it!

Using a Roth IRA as your preferred investment account allows you to grow your wealth tax free.

A Roth IRA is such an incredibly flexible investment account that you can use it for your own, your spouse’s or your children’s college expenses, use it towards the down payment on your first home, use it to help care for you if you have a serious medical condition or become permanently disabled, or even (and here’s the kicker) withdraw your contributions for any reason at any time.

This type of investment account by far has the longest list of benefits of any other type of investment account, in my humble opinion! Read more in Roth IRAs Are Financial Life.

Traditional IRA

This account is a tax deferred account, which means your contributions are removed from your taxable income in the year you contributed and you will not owe taxes until you retire.

However, when you do begin withdrawing in retirement, you will need to pay taxes on these withdrawals at your regular income tax rate. Note that you will not only pay taxes on the contributions that you got the tax break on when you contributed, but you will pay taxes on all your growth and dividends.

Also with this account, you’re required to begin withdrawing from this account at age 70 ½, unlike with a Roth IRA, which allows you to grow your investments for up to 2 generations tax free.

As you may have guessed, I much prefer a Roth IRA to a traditional IRA, because protection from taxation on compounded wealth is an enormous gift from the government. However, some circumstances may warrant the use of a traditional IRA, including:

Rolling an old 401k into an IRA.

Many brokerages will require you to roll the old 401k into a traditional IRA first, then convert to a Roth IRA If you choose. In Retire Wealthy I teach you how.

If your income is over the Roth IRA eligibility limit.

You can still have a Roth IRA, but you must first contribute to a traditional IRA or other retirement account you’re eligible for, then convert it to a Roth IRA. You can do this a little at a time, or all at once. This is called a backdoor Roth IRA and it’s perfectly legal and not even frowned upon!

If keeping your current income low outweighs the benefit of the tax free growth provided by your Roth IRA.

One year we were approaching a higher tax bracket, so I switched our contributions from our Roth IRAs to our traditional IRAs to keep us under the higher bracket to save us an out-of-the-ordinary amount in taxes for the year. After that tax year switched up our yearly tax planning and we switched back to contributions to our Roth IRAs.

Self-employed retirement accounts

When you own a business with positive net earnings, you can open yourself even more types of retirement accounts, like an SEP IRA (which is my favorite). These self-employed accounts can have much higher contribution limits. You can even convert them to a Roth IRA, which is a great way for high earners to get around the contribution limits.

Investing for your kids

I’m a mother to 3 beautiful boys. When I understood the power of investing and how much money can be created when you start early in life, I was blown away. I wanted to put every spare coin away for my kids so they could have a better start than I did.

Remember about the oxygen mask though!

You’re doing right by your children when you prepare for your own retirement first.

Why? Because then you don’t run the risk of sucking them dry for financial support when you get to old or sick to work (and it will eventually happen to us all!)

Once you’ve got a solid plan to be prepared for retirement, you can begin setting your kids up for financial success. There are a few different types of accounts you can begin for your kids.

You can choose one or choose them all, depending on what your goal is:

529 college plan

These college savings plans are operated by either the state or higher education institutions. These tax advantaged accounts function similarly to a 401k, in that you simply contribute and your dollars are invested in a set selection of funds. This money must be used for qualified college expenses, or you’ll pay a 10% penalty.

Coverdell ESA

This account is also used to save for college, but I like it for its added flexibility. Not only can you choose a variety of different investments in this type of account, including individual stocks and real estate, but you can also use this account for tuition at K-12 private schools.

Custodial brokerage account

This type of account is technically a regular, taxable account (explained below), except it’s opened for a minor. This account can be used for anything that benefits the child, not just college. In addition, although it’s a taxable account, children have a lot of space to make money in investments before they’ll owe taxes. More information in Make Your Kid Rich With $10 A Week.

Taxable accounts

The above listed accounts all have some sort of tax incentive. Once you’ve exhausted these account types, then it’s time to move to a regular, taxable brokerage account.

While taxable accounts are the last resort option when it comes to investing, they still have some perks:

There are no rules or penalties as to what you can use this money for, or when. You can retire early, buy a car, travel the world, or spend it on Crown and strippers. It’s nobody’s business but yours.

Taxable brokerage accounts are still taxed more favorably than the income you make at your job. Most people reading this will not pay more than 15% in investment tax, and those with income under certain limits will pay no tax at all on their investment income.

However, you must still use the tax shelters available to you, especially if you can contribute to a Roth IRA.

Remember that Roth IRA contributions can be used at any time for any reason. Earnings can be withdrawn at any time for any reason once your Roth IRA has been open 5 years. You really should not use a taxable account until you’ve contributed the maximum to your Roth IRA. Why pay taxes if you don’t have to?

Read How to Open Your Roth IRA (and Why You Need One).

When you’re starting at the bottom, you have to maximize every cent! Learn how all these accounts work and what goes in them in Retire Wealthy!

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