Pros & Cons of Personal Investment Accounts

A personal investment account gives you flexibility.

As an investor, it is a good idea to have money in both tax-deferred and personal accounts. Having both types of accounts gives you additional flexibility and helps you make the most of all your investment opportunities. But even though having a personal investment account is important, there are some things to watch out for along the way.

Wealth Building

Whether you need to accumulate wealth for retirement, the education of your children or another long-term goal, the sooner you get started with your investing, strategy the better off you will be. Opening up a personal investment account gives you an additional way to save, over and above any workplace retirement plans you might have access to. Having money in personal accounts also gives you additional flexibility if you decide to retire before you are eligible to tap your 401k, IRA and other retirement assets.

Consistent Investing

Opening a personal investment account is one of the best ways to develop the discipline you need to invest consistently for the long run. After the account is open, you can set up an automatic transfer that moves money from your checking or savings account to your investment account. This forces you to save and helps you develop the long-term wealth you will need for retirement and other financial goals.

Taxes

When you have money in a personal account, you must pay annual taxes on the capital gains, dividends and interest that account accrues. This is true even if you choose to have your dividends and capital gains reinvested in additional mutual fund shares. You can lessen the tax burden somewhat by choosing tax-efficient investments like index funds for your personal investment account. You can use your tax-deferred accounts, including 401k plans and IRAs, for more aggressive investments.

Risk of Loss

Whenever you invest in the stock market, or even the bond market, you always have a risk of loss. It is important to recognize this risk and make your investments accordingly. That means not investing short-term money in the stock market, and choosing investments that match your needs and your tolerance for risk. Investors who can afford to keep their money invested for many years might prefer high-growth stocks, even though they can be somewhat risky. Investors who need the money in a relatively short period of time might want to lean more toward government bonds and other safer investments.

References

• CNN Money: Saving Beyond Your 401k and IRA