Are you confused or unsure about which type of account you should open? The rules are subtle, and the differences can be confusing. To help you navigate the financial landscape, we created this glossary to explain common account types — all in one place. The accounts are conveniently categorized by:

  • Personal Investment Accounts
  • Individual Retirement Accounts (IRAs)
  • Defined Contribution Employer Retirement Plans (e.g., 401(k)s)
  • Defined Benefit Employer Plans
  • Health Savings Accounts
  • Education Savings Accounts
  • Self-Employed or Small Business Retirement Accounts

If you have questions, Tilly is happy to help you! And please keep in mind that this glossary is just a summary of these accounts. Consult a professional before opening an account.

Personal Investment Accounts

Brokerage Account – A brokerage account is an investment account that allows you to buy and sell a wide variety of investment vehicles such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Investment growth within a brokerage account is taxable, so any dividends, gains, or losses are reported annually to the IRS.

Individual Brokerage Account – A brokerage account in the name of one person only.

Transferable-on-Death Brokerage Account (aka, Designated Beneficiary Account) – This is a brokerage account in which the account owner(s) designate beneficiaries that will receive the assets upon the owner(s)’s death. This allows the account ownership to change without going through probate.

Joint Brokerage Account – The most common joint brokerage account is Joint with Rights of Survivorship. This account allows both individuals to have equal rights to the account’s assets. All assets are inherited by the surviving co-owner if one of the joint owners should pass away.

Another type of joint brokerage account is a Joint Tenants in Common Account. These accounts are typically used when two or more people own assets together, but each party chooses how to distribute the assets at their death.

Uniform Gifts to Minors Act/Uniform Transfers to Minors Act – UGMA or UTMA accounts are custodial investment accounts in a child’s name that is controlled by a parent or relative until the child reaches the age of maturity. This age can differ from state to state.

The parent or relative can make contributions and invest the assets for the benefit of the child, and the account is taxable at the child’s lower tax rate. Since these accounts are in the name of the child, they can negatively affect the ability of the child to be eligible for college loans.

Individual Retirement Accounts (IRAs)

Traditional IRA & Rollover IRA – A traditional IRA (or Rollover IRA) is a retirement savings account that allows the participant to make tax-deductible contributions up to $6,500 per year ($7,500 if age 50 or above), per 2023 maximum contribution limits. You must have earned income to contribute to the account, and the invested money grows tax-deferred. In retirement, distributions are taxable. You must be age 59 ½ before taking distributions, or you will incur a tax penalty. You also must start taking mandatory required minimum distributions at age 73. High income can limit or preclude you from being able to make tax-deductible contributions to a traditional IRA.

There is no difference between a traditional IRA and a rollover IRA. At one time, they did have small differences, but a change in the law made them the exact same account type.

Roth IRA – A Roth IRA is a retirement savings account that allows the participant to make after-tax contributions up to $6,500 per year ($7,500 if age 50 or above), per 2023 maximum contribution limits. You must have earned income to contribute to the account, and the invested money grows tax-free.

High income can limit or preclude you from being able to make Roth IRA contributions. If your income is too high, backdoor Roth IRA contributions may be an option.

You can take Roth IRA distributions from your contributions penalty-free, provided that your account has been open for at least five years. Roth IRAs do not require required minimum distributions, but you must wait until age 59 ½ to take distributions from account growth to avoid a tax penalty.

Roth IRAs are excellent accounts for long-term growth and flexibility for access to retirement funds in certain situations. This account allows for penalty-free withdrawals up to $10,000 to buy your first home and to fund higher education expenses.

Spousal IRA or Spousal Roth IRA – A spousal IRA or spousal Roth IRA allows a non-working spouse with little to no earned income to contribute up to the maximum contribution limit based on their spouse’s earned income. The couple must file taxes jointly to be eligible.

Beneficiary IRA or Inherited IRA – These terms are interchangeable for the same account type. This account is opened when a person is the beneficiary of a traditional IRA, where the original owner has passed away. Further contributions cannot be made to a Beneficiary IRA by the new account owner, however, and distributions are taxable to the beneficiary.

Different rules regarding required minimum distributions and account liquidation apply dependent upon: (i) the relationship between the new owner (beneficiary) and the original owner (decedent), (ii) age of the original owner at death, and (iii) the year of the original owner’s death.

Beneficiary Roth IRA or Inherited Roth IRA – These terms are interchangeable for the same account type. As the beneficiary of a Roth IRA, you must empty the account within 10 years. No taxes will be owed on the distributions.

Different rules regarding required minimum distributions and account liquidation apply dependent upon: (i) the relationship between the new owner (beneficiary) and the original owner (decedent), (ii) age of the original owner at death, and (iii) the year of the original owner’s death.

Defined Contribution Employer Retirement Plans

401(k) & Roth 401(k) – Employer-based retirement plans allow participants to contribute up to $22,500 annually ($30,000 if age 50 and above), per 2023 contribution limits. Unlike their IRA counterparts, there are no income limitations that restrict contributions to these accounts.

A 401(k) that allows for employee Roth contributions is referred to as a Roth 401(k). With a Roth 401(k), the employee has the option to make pre-tax or Roth contributions, or a combination of them. The plan will track which contributions are pre-tax vs. Roth and track the growth accordingly as well.

Typically, employers also contribute to these accounts by matching the employee contribution up to a limit or with a safe harbor contribution. All employer contributions are pre-tax.

Defined contribution accounts, such as a 401(k), allow for the participant to select their own investment choices from a pre-determined set of options. The participant takes on the investment risk within these plans by deciding their own investment mix.

Withdrawals from 401(k) plans can be made when the participant turns 59 ½. All distributions will be considered income and taxed at the participant’s income tax rate at the time of the withdrawal. If a participant should leave their employer before the age of 59 ½, they may also take a withdrawal but will owe a 10% tax penalty in addition to income tax.

The participant may also take distributions if they retire at the age of 55 or later or if the participant takes substantially equal periodic payments. A financial advisor can help advise in both of the last two options.

There are many other situations listed below in which penalty-free withdrawals can be made. All withdrawals will still owe taxes based on the participant’s income tax rate at the time of the withdrawal. These situations include:

  • The participant becomes disabled.
  • They are required to split the account with an ex-spouse due to divorce.
  • They are adopting a child (up to $5,000).
  • They need to pay an IRS levy.
  • They are the victim of a disaster.
  • They are a military reservist called to active duty.

403(b) – A 403(b) plan is very similar to a 401(k) plan, but it is the plan-type offered by public schools, non-profits, and churches. Some organizations are offering Roth 403(b) options. The withdrawal rules for a 403(b) are very similar to the 401(k).

457(b) – A 457(b) is an employer retirement savings account, similar to a 401(k), that is only offered to state employees, local government employees, and some tax-exempt organizations. Some organizations are offering Roth 457(b) options. It does not offer an employee match. This account is known as a deferred compensation account.

457 deferred compensation accounts have the added benefit of allowing withdrawals without penalty before age 59 ½, as long as you have terminated your employment. Although these withdrawals are taxable, the account is more accessible for those who opt for early retirement before age 59 ½.

Defined Benefit Employer Plans

Cash Balance Plan – A cash balance plan is a pension that credits a participant’s account each year with a pay credit based on compensation level plus an interest credit. The employer makes all contributions and assumes all the investment risk of the portfolio. Once the participant is eligible to receive the benefits, he or she would be able to take annuity payments based on the account balance or a lump sum that can be rolled into an IRA.

Government Pension Plan – Most state and federal branches offer government pension plans based on length of service with calculations that consider top earning years. The investment risk is taken on by the pension system.

Health Savings Accounts

Health Savings Account – A health savings account (HSA) is a tax-advantaged account for participants covered under an eligible high-deductible health plan. Contributions to the account can be made by the employee and the employer. Individuals can contribute up to $3,850 a year, and a family can contribute up to $7,750 per year, per 2023 contribution limits. These contribution limits apply to the sum of the contributions by both the participant and employer. Participants age 55 and above are able to make an additional catch-up contribution of $1,000 each year.

This account is often referred to as having a triple tax benefit.

  • Funds contributed by the employee are made pre-tax.
  • Many HSAs allow for the contributions to be invested, which allows this account to be a valuable retirement savings account. Invested dollars grow tax-deferred. Penalty-free distributions can be made after age 65, but distributions not used for qualified medical expenses will be taxable.
  • Distributions for qualified medical expenses can be withdrawn tax-free at any time, which makes the HSA one of the most attractive savings vehicles. There is no time limit for when the distributions must be made, so if you save your receipts over the years, you can use them to support tax-free distributions in the future.

It is important to note that other health benefit accounts, such as FSAs and HRAs, have different rules than an HSA.

Flexible Spending Account – Flexible spending accounts (FSAs) allow employees to contribute pre-tax dollars to the account to be used for qualified expenses. Medical expense FSA accounts allow for contributions up to $3,050 per year. All savings must be used in the year in which they are taken, or they will be forfeited. Some employers do offer a grace period of up to 2 ½ months the following year to use the money or the ability to carry over up to $610 per year to use the following year.

Dependent Care FSA – The dependent care FSA allows for a couple filing jointly to save up to $5,000 per year and a single filer to save up to $2,500 per year towards childcare costs.

Health Reimbursement Account – A health reimbursement account (HRA) is funded by an employer. Once an employee has a qualified medical expense, they request to be reimbursed by the HRA account.

Education Savings Accounts

529 Plan – A 529 plan is a tax-advantaged savings account that allows an account owner to pay for education expenses from kindergarten through graduate school for the designated beneficiary. All contributions made to the account can be invested and grow tax-deferred. All withdrawals are tax-free if used for qualified education expenses. Each state has their own 529 plan, and some states offer a state income tax benefit on contributions as well.

The account owner designates a beneficiary at the point of opening the 529, but the beneficiary can be changed at any time. If there are any funds left in the 529 account and the account has been funded for at least 15 years, the money may be rolled into a Roth IRA account with the beneficiary being named as the Roth IRA account owner.

There are no annual contribution limits with a 529 plan, but any amount over $17,000 will go toward the giver’s lifetime gift tax exemption limit. Those who want to gift a larger sum are allowed to contribute $85,000 every five years without triggering the gift tax limit.

Coverdell Education Savings Account – Coverdell accounts are similar to a 529 account in that they offer tax-free growth if the distributions are used for qualified education expenses. Contributions are limited to $2,000 per year, and the account can only be set up for a beneficiary under the age of 18. Contributions are not allowed after the beneficiary turns 18.

The positive feature of a Coverdell is that the investment options are limitless. The 529 plan investments are limited to what each state’s 529 plan custodian offers, though most state 529 plans have decent investment options.

Self-Employed or Small Business Retirement Accounts

SIMPLE IRA – A SIMPLE IRA plan is for businesses with 100 employees or less. It is relatively easy to set up and allows for business owners to contribute a non-elective 2% to eligible employees’ accounts or a match up to 3% based on employee contributions.

While the employer contributions are tax-deductible for the business, the owner is only allowed to save a total of $15,500 per year. There is also no Roth option available for SIMPLE IRAs.

Simplified Employee Pension (SEP) IRA – A SEP IRA is similar to a traditional IRA but allows the self-employed individual to contribute up to 25% of their compensation, up to a maximum of $66,0000 per year. If the self-employed individual has employees, they must contribute the same percentage to the employee accounts as their own account. Employees must be at least 21 years old, earn at least $750 per tax year, and have worked for the employer for at least three of the past five years to be eligible to receive contributions. The employer can also make these requirements less restrictive if they choose.

Solo 401(k) or Individual 401(k) – These terms are interchangeable. A solo 401(k) is best for solo-owned businesses without employees, though exceptions are made for business partners and spouses. A solo 401(k) allows a participant to contribute as an employer and an employee. As an employee, you can contribute up to the maximum of $22,500 in 2023 and then an additional 25% of your net-adjusted self-employment income.

Other benefits of a solo 401(k) include the option to add a solo Roth 401(k). Only employee contributions can be made into the Roth account, but having a mix of the Roth and traditional accounts is a benefit the SEP or SIMPLE IRA cannot offer. Additionally, you can take a loan from the solo 401(k) up to the lesser of 50% of the account value or $50,000.

There are many more account types in the investment universe that may perform best for you. Working with a CFP® at Tilly can help you discover the accounts that best fit your personal needs.