How to open an investment account

How to open an investment account

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Maybe you’re self-employed and want to start a retirement account. Perhaps you’ve switched jobs and aim to put your 401(k) in an account with better options. Or maybe you just want to try your hand in the bull market.

Whatever your motivation, there comes a time in your life when you need to open an investment account.

There’s good news on this front: Brokerage firms want your business, and there are plenty of good brokers to chose from. These companies vie for your money by offering free trades and slick platforms.

Opening an investment account is a relatively straightforward exercise.

Here’s a five-step guide:

Step 1: Decide what type of account you need.

Investment accounts fall into two broad categories – fully taxable and tax-advantaged. In a taxable account, any trading profits and dividends are subject to federal taxes. This is a place to invest money you might need if five to 10 years – to buy a house, for instance, or a car.

In a tax-advantaged individual retirement account, on the other hand, you’ll receive tax benefits designed to spur you to save for retirement. With a Traditional IRA, a SIMPLE IRA or a SEP-IRA, your contributions are not taxable, but you will pay taxes when you make withdrawals.

With a Roth IRA, you receive no upfront tax benefit, but you can make tax-free withdrawals when you reach retirement age.

Retirement savers commonly use Traditional IRAs as a place to put retirement investments in a 401(k). If you’ve left a job and don’t like the choices or fees in your former employer’s 401(k) plan, you might find a better deal with another broker by rolling the 401(k) plan into an IRA. You’ll owe no taxes so long as you don’t withdraw any of the money.

Step 2: Shop around for a broker.

Most brokers have stopped collecting commissions when you buy or sell stocks or mutual funds, so selling points such as $9.99 trades have gone away. But there are other things to consider:

Cash bonuses.: Brokers often dangle incentives to get you to move money over. This shouldn’t be the only factor you weigh, but free money never hurts.
Research: Many brokers offer access to third-party research from firms such as Standard & Poor's and Morningstar.
Foreign trading: If you plan to trade on international stock exchanges, look for a broker that lets you convert money in your account into foreign currencies.
Fractional shares: If your portfolio is small enough that you can’t afford an entire share of a high-flying stock, check to see if the brokerage lets you buy a fraction of a share.
Advice and education:While modern investment is mostly a do-it-yourself endeavor, many brokers will connect you with a financial advisor. If this is important to you, check whether a broker will offer advice, either for free or for a fee. Many brokers also offer webinars to teach their customers about investing.
Convenience: Some brokerages operate brick-and-mortar networks. If you expect to visit your brokerage in person, make sure there’s a location near you.

Step 3: Choose a brokerage firm.

After studying brokerage firms’ offerings, analyze the advantages and disadvantages of each. Don’t sweat this step too much – the big-name brokerages offer similar services, and if you’re a buy-and-hold investor building a portfolio of exchange-traded funds, any reputable firm should meet your needs.

Step 4: Fill out the new account paperwork.

The complexity here is about the same as opening a bank account. You’ll prove your identity by offering a driver’s license and Social Security number, and you’ll answer some boilerplate questions about your net worth, your wealth and your investment goals. Be sure to name a beneficiary.

Step 5: Fund the account.

Before you can start investing, you’ll need to move money into your new investment account. You can accomplish this by an electronic funds transfer, a wire transfer or a check. In the case of a 401(k) transfer to an IRA, you’ll fill out some forms and move your existing holdings over to your new investment account.


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