Account Type Clarity

Types of investment products are nearly limitless and can, and will change based on many different factors. In other words, the types of investment accounts are determined by the investments.

About The Speakers

Mike McGraw, CRPC®
President, James Capital Alliance
Marketing & Relationship Manager, James Investment Research, Inc.
Territories covered: OH, IL, GA, SC, NC, VA

Neil Craft
Client Relationship Manager

Neil Craft: Hello and welcome the James Market Clarity podcast. I'm your host Neil Craft. On today's episode. I am joined by the President of James Capital Alliance Mike McGraw. Mike is a graduate of the University of Dayton. He's a Chartered Retirement Planning Counselor and has over 25 years experience in the industry. Mike, welcome to the show.

Mike McGraw: Thanks for having me Neil.

Neil Craft: It’s my pleasure. I am very excited to have you here with our listeners today and dive into our discussion. Today's topic is going to center around trying to provide clarity when it comes to account types. Mike, I think the first thing that I'd like to get started with here today is if you could give us some background on the simple difference between investments and accounts.

Mike McGraw: Absolutely. So when discussing investments and investment account types, the two terms are often combined and used interchangeably as one, which can sometimes create confusion. I remember a prospective client years ago asking me what type of investment account would help him to achieve his goals. And what he really meant to say was what type of investments would help him to achieve his goals?
The answer to his intended question of types of investments, would have taken a great deal of time to answer, and it's very individualistic. Types of investment products are nearly limitless and can, and will change based on many different factors like health, marital status, family situation, retirement goals, investment goals, risk tolerance, and on and on. In other words, the types of investment accounts are determined by the investments.

Neil Craft: Gotcha. So investments essentially will go inside the account. So I guess with accounts, how many types of accounts are there?

Mike McGraw: Well, there are several different types, but we can boil it down to basically four different kinds. They have rules and limits on each one regarding types of investments that can be held in the account itself.

Neil Craft: Perfect. Can you give our listeners a run through of the four types that you mentioned, and some of the most important things we should know about each of these accounts?

Mike McGraw: Sure, sure. I'll try to keep it as simple as I can and mention the highlights of each type. The first one would be a standard brokerage account which is also referred to as a taxable brokerage account, or a non-retirement account. This provides access to a vast range of investments, including stocks, bonds, ETFs, (which are exchange traded funds), EDRs, (which are American depositary receipts), and more. Any interest or dividends you earn on investments, as well as any gains on investments that you sell are subject to taxes in the year that the money's received.
With a non-retirement account like this, you can own it as an individual taxable brokerage account or as a joint taxable brokerage account. The individual account is opened by obviously an individual who retains ownership on the account, and then will be solely responsible for the taxes generated in the account.
The joint account is shared by two or more people, typically spouses. But it can be open with anyone, including the non-relative. Now, when a brokerage account is open, the firm will ask whether you want a cash account or a margin account. A cash account is appropriate for the majority of investors and allows you to buy investments with money you deposit into the account. A margin account is for investors who want to borrow money from the broker to buy investments. Now, the margin trading is riskier and it's better suited for advanced traders who understand things like margin calls and the like. There are no limits on how much money you can contribute to a taxable brokerage account, and money can be withdrawn at any time, although you may owe taxes if the investments you sell have increased in value.
The second type of account is a retirement account, such as an IRA. This is an individual retirement account, and is a standard brokerage account with access to the same range of investments as the first time. The biggest difference between the first two types of accounts is how the IRS taxes or doesn't tax contributions, investment gains, and withdrawals.
The most common types of retirement accounts are traditional IRAs and Roth IRAs and many brokers also offer specialty retirement savings accounts for small business owners and self-employed individuals such as a SEP IRA, a simple IRA, a solo 401k. I would mention too, if the company you work for offers a 401k plan and matches any portion of the money you save in that account, you should probably contribute to that 401k to get the full match before funding an IRA. Matching is simply additional money for you.

Neil Craft: Right. We, we don't want to turn away extra money. Do we, Mike! So I know the frequently asked question for sure amongst our listeners would be what's the difference between the Traditional IRA and the Roth IRA? I know the Roth IRA gets a lot of headlines. Could you speak on that difference for us?

Mike McGraw: Yeah. The, the main difference is in the timing of the tax break that you get. Both types of IRAs have their place, and many advisors recommend using both. So in a Traditional IRA, you receive an upfront tax break in the year you make contributions to the account in a Roth IRA, you receive back-end tax break that allows your money to grow tax-free and therefore makes your withdrawals in retirement tax-free as well. You must have earned income or a spouse with qualified earned income to be eligible, to contribute to an IRA. And there are also income limits for contributing to a Roth IRA and for deducting contributions to a Traditional IRA. The maximum an individual is allowed to contribute to an IRA in 2020 and 2021 is $6,000 or $7,000 if you are 50 years or older.

Neil Craft: Gotcha. Okay. This is all good information, Mike. I know our listeners appreciate it. What's the third account type you have for us today?

Mike McGraw: Yeah, the third type involves education savings. And so within this type, the first subtype, then if you will, is called a 529 Savings Plan. Now, this is different from the 529 prepaid tuition plans that let you lock in the in-state public tuition at the institution that runs the plan and most states offer their own 529 plans that you can open directly, but typically the money can be used at eligible schools nationwide. Some brokerages also allow you to open a 529 plan. The second subtype, if you will, under this education type is called the Coverdell Education savings account. An Education Savings account must be set up before the beneficiary of 16 and similar to 529’s. The money can be used for college, elementary and secondary education expenses. The beauty of the education accounts is anyone relative or not can contribute to these plans on behalf of a beneficiary. Additionally, anyone can be named as a beneficiary on the account as long as the money is used for qualified education expenses. As far as taxes are concerned, contributions are not tax deductible. Although you might get a state tax deduction on 529 contributions, but qualified distributions are tax free.

Neil Craft: Okay. Very interesting stuff there. Mike, this brings us to our fourth and final account type for today to review. Would you do the honors?

Mike McGraw: Sure. Last, but certainly not least. The last type of account is opened for the benefit of kids. This custodial brokerage account, if you will, is set up for a minor with money that's gifted to the child and adult would function as the custodian and maintains the account control and then transfers assets to the child when he, or she turns the age of majority, which is either 18 or 21, depending on state laws.
So the two types of custodial accounts are called UGMA, which is the Uniform Gift to Minors Act and the UTMA, which is the uniform transfers to minors act. The difference is the type of assets you're allowed to contribute to the account. Both of them can hold cash, stocks, bonds, and mutual funds, but the UTMA can hold real estate.
In addition to the rest. Once the money is in the account, it can't cannot be transferred to another beneficiary, and a child does not need earned income for the UGMA. The state roles vary with some allowing UGMA’s some allowing UTMA’s and some allowing both. So you really have to check the state to see what they approve. Unlike money in an education account, money put into a UGMA or a UTMA can be used for any purpose, not just college tuition. The one downside, however, to this type of account is, assets in a custodial account are considered the students. So if that student applies for financial aid, it can affect their eligibility and the amount of the financial aid that they might receive.

Neil Craft: Okay. Good to know, especially for minors who are getting ready to apply for a college and the like, thanks. This has all been really helpful. Say I'm a prospective client. I'm an individual who wants to get started. Where can our listeners open these different types of accounts for themselves?

Mike McGraw: Well, most financial institutions offer standard brokerage accounts and IRAs, and many also offer Education Savings Accounts as well as custodial accounts. If you want to pick and manage your investments on your own, opening an account at a custodian such as E-Trade or Schwab or Fidelity or Vanguard would probably be the way to go.
However, if you want someone to manage your investments for you, then I would definitely recommend a full service brokerage with an advisor that comes along with that. For example, Morgan Stanley UBS. Wells Fargo are some of the main wire houses that would offer those features for you.

Neil Craft: Okay, Mike, this is tremendous. It's been great having you here on the podcast. I really appreciate your time. Thanks again.

Mike McGraw: No problem. Thanks for having me.

Neil Craft: To learn more about what types of accounts are offered at James investment, be sure to visit us online at or, give us a call at (937) 426-7640. James Investment: Your Future, Our Purpose.


Typical Allocation Range

Equity: 40% - 70%
Fixed Income: 30% - 60%
Cash: 1% - 15%

Small, mid, and large cap stocks
Benchmark: 25% Russell 1000® Index , 25% Russell 2000® Index and 50% Bloomberg Barclays Aggregate U.S. Intermediate Government/Credit Bond Index

The Balanced strategy has a target range of 40% - 70% in equities, with a mix of small, mid, and large capitalization stocks. We weight the stock exposure toward the most advantageous market capitalizations based on our research.

Sector analysis in an important part of our portfolio management process. Changes in sector weightings are made based on our analysis.

We believe that having the maximum flexibility to follow our research is the key to adding value to our clients' accounts.