You are probably familiar with several types of investment account registrations, but many people do not know all the options available, or the advantages of one type over another. When a new account is opened, it is registered in the name(s) of one or more persons, who are the account owners. They are the only individuals who may access and control the assets in the account. There are many types of account registrations including:
Traditional or Rollover Individual Retirement Account is also referred to as a regular IRA. It is available to those under age 70 ½ who have earned income (as opposed to passive income). Earnings grow tax-deferred until withdrawal, which must begin when the owner reaches age 70 ½. In 2015, the contribution limit is $5,500 for individuals under 50; $6,500 for those 50 or better. Contributions may be tax deductible, depending on if you or your spouse are covered by a retirement plan at work and your Modified Adjusted Gross Income (MAGI).
Roth or Roth Conversion Individual Retirement Account is a non-deductible IRA in which qualified distributions (withdrawals) are not taxable. A distribution is considered qualified if it meets any of these criteria: the owner is over 59 ½, it is paid to a beneficiary after the owner’s death, if the owner is disabled, or it is used to acquire a principal residence (if the owner is a first-time homebuyer). Annual contribution limits are reduced by any contribution made to a traditional IRA and are limited based on MAGI. Contributions may be made even if the owner is over 70 ½. Traditional IRAs may be transferred to a Roth Conversion IRA at any income level. Transferred amounts, whether or not taxable, must be included in that year’s tax return, and the money transferred will be exempt from the 10% penalty for a withdrawal prior to age 59 ½.
Spousal IRA is either a Traditional or Roth IRA funded by a married taxpayer in the name of his or her nonworking spouse. The couple must file a joint tax return in the year of the contribution. The working spouse may contribute up to $5,500 per year ($6,500 if over 50) in 2015 to both their IRA and their spouse’s IRA up to the earned income amount of the wage earner. The deductibility of the contribution is based on MAGI and other factors.
Individual accounts have a single owner, who is the beneficiary and the only person who has control of the account. Transfer on Death (TOD) or Payable on Death (POD) allows an owner to appoint a beneficiary to receive all or a portion of his/her share upon their death. This avoids probate because it allows for the transfer of assets without being included in the estate, thus it can be a helpful estate planning tool.
Joint accounts have two or more adult owners named on the account. Each person has some degree of control over the account. All the owners must sign a joint account agreement form, and the account is designated as either Tenants in Common (TIC) or Joint Tenants With Right of Survivorship (JTWROS). In either type of account, any or all owners may conduct business in the account. If the account is registered under TIC ownership, the tenant’s (co-owner’s) estate retains his/her fractional share upon death and is not passed on to the surviving owners. These accounts do not necessarily give equal interests to each owner. On the other hand, JTWROS accounts stipulate that a deceased tenant’s share passes to the remaining owners. All owners have equal control over the account.
Trust accounts are available for all kinds of trusts, revocable or non-revocable, and are set up to manage the assets of the trust. The trustee is the fiduciary who is tasked with preserving the trust assets and making them productive. However, depending on the trust agreement, they may or may not be limited in their ability to use margin, calls, puts, short sales, and other speculative instruments.
Partnership accounts involve an unincorporated association of two or more people. Partnerships often open various types of accounts necessary for business purposes. A partnership agreement must be completed specifying which individuals are allowed to make transactions in the account. If the partnership opens a margin account, they must disclose any investment limitations. If any changes are made, an annual amended partnership agreement must be made. This is similar to a corporate resolution.
Corporate accounts must include a corporate resolution (among other documentation), authorizing the opening of the account, and identifying which members of the company may trade in the account.
Fiduciary and Custodial accounts are trust accounts. In these accounts someone other than the owner conducts the trades. The manager or trustee is the fiduciary. Money or securities are placed in the account for the benefit of another person, usually a minor, and is managed by the fiduciary, who must act in the best interest of the owner. Fiduciaries include: trustees, executors of a will, administrators, guardians, parents, and custodians.
Power of Attorney may be added to an account to authorize a person not named on the account to have trading or other authority. The account owner must file a written authorization called a Power of Attorney with the custodian to give that person access to the account. This authorization may be full or partial.
And that’s not an exhaustive list by far. Also, the information shown above is general in nature. We recommend you discuss legal matters regarding account selection with your attorney and tax provisions with your CPA. Of course, when opening a new account DWM will discuss the pros and cons of appropriate options with you. You won’t have to have all this memorized- but a little bit of background knowledge is always a good thing.