Chapter 3. Choosing the Best Account Type for You

In This Chapter

  • Understanding how different brokerage accounts are taxed

  • Distinguishing between taxable accounts and tax-deferred accounts

  • Knowing the different ways brokers can assign ownership to accounts

  • Understanding the advantages and disadvantages of 401(k)s and IRAs

  • Finding out about ways to cut the tax bite when saving for college

Online investors tend to be do-it-yourself types, so it's unlikely that they'll have tax consultants on retainer just waiting to handle any tax issues they might have. No, many online investors are big on going it alone, which can be rewarding as long as such investors become tax-savvy, especially when it comes to how taxes on the different accounts vary.

In this chapter, I explain how investments are taxed and discuss ways in which picking the right kind of account can cut your tax bill. You'll want to understand the differences between the three main types of accounts — taxable, retirement, and education savings — before you sign up with an online broker. I also show how online tools can help you track and reduce your taxes. Finally, I step you through the different types of tax-advantaged accounts that can help you reach long-term goals such as saving for your child's college education or for your retirement.

Knowing How Different Accounts Are Taxed

Brokerage accounts might all seem the same; after all, they're just holding tanks for investments. Different types of brokerage accounts, though, look very ...

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