Investment Accounts

What is an Investment Account?

The term ‘investment account’ simply means an account that allows you to make investments by buying or selling securities, such as stocks, bonds, or mutual funds. You can open an investment account through various institutions, including banks, mutual fund companies, and stock brokers.

My Life & Wishes - Investments After Death

An investment account may be used by an individual to hold assets like stocks and bonds to provide them with income during their retirement. It may also be useful for a parent wishing to save money for their child’s education or to a newlywed couple wanting to save money for a down payment on a house.

Types of Investment Accounts

There are two major types of investment accounts: taxable and tax-advantaged.

Taxable investment accounts are funded with after-tax money and receive no special tax treatment of any kind. These accounts are fully taxable, but the investments are easily accessible. There is no limit to how much money you deposit into these accounts.

Tax-advantaged accounts include accounts like Roth and Traditional IRAs, 401(k)s, and 403(b)s. In most circumstances, if you withdraw money from a tax-advantaged account before age 59½, you will pay a penalty in addition to regular income tax. There are also restrictions on how much money can be deposited into these accounts per year.

What Happens to Investment Accounts When the Account Holder Dies?

In your will you can be very specific about who gets your property. However, when it comes to retirement accounts, life insurance, and certain other financial accounts, it’s important to name a beneficiary.

If a beneficiary has been named on your investment accounts, the assets will generally transfer fairly easily. It’s important to know that the assets will be distributed to the named beneficiaries, regardless if the will stipulates anything contrary about the account.

If there are no named beneficiaries on the account or if there is a complication with the named beneficiary, the account will be subject to probate. The probate process varies by state, but chances are a stranger will determine who gets what.

Naming a Beneficiary for Your Investments

If you’re married, your spouse is likely going to be your primary beneficiary. The laws in each state vary, but in some cases, such as with an employer-sponsored retirement plan [401(k), 403(b)], you will need to get written permission to name someone other than your spouse.

When a spouse is named, there is some flexibility in how the money is distributed. Among your options:

  • Roll over the balance to an IRA or another retirement plan. This keeps the money in a tax-deferred account in the beneficiary’s own name.
  • Leave the money in the original plan account. If the beneficiary does not immediately need the money, this “take-no-action” option is one of the simplest approaches.
  • Take the money in cash. This option works if the money is needed for immediate expenses, but income taxes will be due, and the beneficiary loses out on the future earning potential of the investments.

If you’re single, you can name anyone as your beneficiary. Other family members, such as parents or siblings, may be a comfortable option. Charities are another popular option.

Parents often name their minor children as beneficiaries; however, without appointing legal guardians, the court could decide when and how kids receive the money.

Naming a contingent beneficiary is recommended. A contingent beneficiary is a person (or persons) who could receive the money if your primary beneficiary dies or is incapacitated.

Finally, make sure you stay in control of who inherits your assets by updating the account beneficiary information any time your life changes, such as a marriage, birth of a child, a divorce, or death of a spouse.

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