So, what is it exactly?
This is simply your garden-variety investment account. It’s different from the types of investment accounts sponsored by the government to encourage certain types of saving—like a traditional IRA a Roth IRA, etc. in that it has no special tax-sheltering status. It’s an account, opened by an individual (or with a spouse or partner), through which the owner can buy securities, stocks, bonds, and whatever risky (or risk-averse) investments he or she prefers.
What are the pros?
The advantage of an investment account is essentially the advantage of investing your money in markets—securities, bonds, exchange traded funds, etc.—rather than simply putting your assets into a savings account. (or worse, checking.) Namely the chance to make a better return (with, of course, the risk of suffering a worse one) than you could with a traditional bank account.
Personal accounts also offer some added flexibility compared to a Traditional or Roth IRA in that you can withdraw your money at any time for any reason. And, if you hold your investments for more than a year before withdrawal, you’ll pay only the long term capital gains tax (currently between 0% and 20% depending on your tax bracket) on any gain in your account.
And while, yes, you won’t get to use your contributions to lessen your income for tax (as with a traditional IRA) or withdraw the funds tax-free when you retire (as with a Roth IRA), if you’ve maxed out all of your tax-sheltered accounts, it’s the only game in town.
Is there anything to be careful about?
Depending on what you use the account to invest in, the risk here is simply…risk. These accounts allow clients to put their money in investments that can make significantly more (or significantly less) than the interest rates on offer at a bank.
And then, of course, taxes! It’s simple. Sell a security for a higher price than you bought it for and you’ll be on the hook to pay what’s called capital gains taxes. (Just a note: There are two types of capital gains taxes. If you’ve held the security for less than one year, the profit is considered a short-term capital gain, which is typically taxed at the same rate as your regular income. But if you’ve held it for more than one year, it’s a long-term capital gain, for which you’ll be taxed at a reduced rate.)
Oh, and let’s talk about fees. That small percentage of your portfolio charged, sometimes in mysterious and opaque ways, by the firm that manages it. Unless, of course, you invest with Wealthsimple. Our fees are 0.5% up to $100,000 and 0.4% above $100,000.