The account type you need depends on what you're investing and who you are

Fidelity offers several brokerage account structures, and the right one depends on your tax situation, who you are, and what you're saving for. A taxable brokerage account has no contribution limits and no withdrawal rules — you pay taxes on gains and dividends each year. A traditional IRA lets you deduct contributions now and pay taxes when you withdraw in retirement. A Roth IRA takes after-tax money now but lets withdrawals in retirement be tax-free. A SEP IRA or Solo 401(k) is for self-employed people or small business owners. A custodial account is for minors. Most people start with a taxable account or a Roth IRA, depending on whether they have earned income and whether they want tax breaks now or later.

The choice matters because it affects how much you can invest each year, when you can withdraw without penalty, and how much tax you'll owe. Opening the wrong account type can cost you thousands in unnecessary taxes or lock your money away when you need it. The good news is that you can open multiple account types at Fidelity, so you're not locked into one choice forever.

Key Takeaways

  • A taxable brokerage account has no limits on how much you can invest or when you can withdraw, but you pay taxes on gains each year.
  • A Roth IRA lets you invest up to $7,000 per year (for 2024) with after-tax money, and withdrawals in retirement are tax-free if you follow the rules.
  • A traditional IRA lets you deduct contributions now if your income is below certain thresholds, but you pay taxes on withdrawals in retirement.
  • Self-employed people and small business owners can open a SEP IRA or Solo 401(k) to save much larger amounts with tax advantages.
  • You can open multiple account types at Fidelity and move money between them, so starting with one does not lock you in.

Taxable brokerage accounts: no limits, but you pay taxes yearly

A taxable brokerage account is the simplest account type and has no income limits, no contribution caps, and no rules about when you can withdraw. You can put in as much as you want, whenever you want, and take money out without penalty. Fidelity calls this a "Fidelity Brokerage Account" or sometimes a "Cash Management Account" if you want to hold mostly cash and money market funds.

The trade-off is that you pay federal income tax on dividends and interest each year, and capital gains tax when you sell an investment at a profit. If you hold a stock for more than one year before selling, you pay the lower long-term capital gains rate. If you sell within a year, you pay your ordinary income tax rate, which is usually higher. Fidelity sends you a 1099 form each January listing all your taxable events, which you report to the IRS.

A taxable account makes sense if you are saving for something in the next few years (a house, a car, a wedding), if you have already maxed out retirement accounts, or if you want complete flexibility with no withdrawal restrictions. It also makes sense if your income is too high to use a Roth IRA or if you are self-employed and have not yet set up a retirement plan.

Roth IRAs: tax-free growth if you follow the rules

A Roth IRA lets you invest after-tax money and withdraw it tax-free in retirement, as long as you are at least 59½ and have held the account for at least five years. For 2024, you can contribute up to $7,000 per year if you are under 50, or $8,000 if you are 50 or older. Your income must be below certain thresholds to contribute directly — for 2024, the limit phases out between $146,000 and $161,000 for single filers, and between $230,000 and $240,000 for married couples filing jointly.

The main advantage is that your money grows tax-free and you never pay tax on withdrawals in retirement. You also can withdraw your contributions (not the earnings) at any time without penalty, which gives you some flexibility. And there is no required minimum distribution — you do not have to start withdrawing at a certain age.

A Roth IRA makes sense if you expect to be in a higher tax bracket in retirement, if you want tax-free growth, or if you want to leave money to heirs tax-free. It also makes sense if you are young and have decades for compound growth to work. If your income is above the phase-out range, you can do a "backdoor Roth" by contributing to a traditional IRA and then converting it to a Roth, though this has tax complications if you already have other traditional IRAs.

Traditional IRAs: deduct contributions now, pay taxes later

A traditional IRA lets you deduct your contributions from your taxable income in the year you make them, which lowers your tax bill immediately. You can contribute up to $7,000 per year (or $8,000 if you are 50 or older) if you have earned income. The money grows tax-free inside the account, but you pay ordinary income tax on withdrawals in retirement.

The catch is that you cannot withdraw before age 59½ without paying a 10% penalty on top of income tax, with some exceptions (first-time home purchase, medical expenses, disability). And starting at age 73, you must take required minimum distributions each year, whether you need the money or not.

You can only deduct contributions if your income is below certain thresholds and you do not have access to a workplace retirement plan like a 401(k). If you do have a workplace plan, the deduction phases out between $77,000 and $87,000 for single filers (2024), and between $123,000 and $193,000 for married couples filing jointly. A traditional IRA makes sense if you want to lower your tax bill now and expect to be in a lower tax bracket in retirement.

SEP IRAs and Solo 401(k)s: for self-employed people and small business owners

If you are self-employed or own a small business, you can open a SEP IRA or a Solo 401(k) to save much more than you can in a regular IRA. A SEP IRA lets you contribute up to 25% of your net self-employment income, with a maximum of $69,000 per year (2024). A Solo 401(k) lets you contribute up to $69,000 as an employee deferral, plus up to 25% of your net self-employment income as an employer contribution, for a combined limit of around $69,000 to $138,000 depending on your income.

Both accounts offer tax deductions for contributions and tax-deferred growth. The main difference is that a Solo 401(k) has more flexibility and allows loans against the balance, while a SEP IRA is simpler to set up and maintain. You must have self-employment income to open either one, and you cannot have employees (except a spouse) to use a Solo 401(k).

Custodial accounts: investing for minors

If you want to invest money for a child or grandchild, you can open a custodial account under the Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). You control the account as the custodian until the child reaches the age of majority (usually 18 or 21, depending on your state). The money belongs to the child, and they will owe taxes on earnings each year.

The first $1,300 of unearned income per year (2024) is tax-free for a dependent child, the next $1,300 is taxed at the child's rate, and anything above that is taxed at the parent's rate until the child turns 24. Once the child reaches the age of majority, the account is theirs to keep or withdraw from — you cannot take it back.

How to choose: a simple decision tree

Start by asking: Do I have earned income this year? If no, you can only open a taxable account. If yes, ask: Do I want tax breaks now or tax-free growth later? If now, open a traditional IRA (if your income is low enough). If later, open a Roth IRA (if your income is low enough). If your income is too high for either IRA, or if you have already maxed them out, open a taxable account. If you are self-employed, open a SEP IRA or Solo 401(k) in addition to or instead of an IRA.

You do not have to choose just one. Many people have a Roth IRA for long-term retirement savings, a taxable account for medium-term goals, and a Solo 401(k) if they have self-employment income. Fidelity lets you open multiple accounts and manage them all in one login.

Frequently Asked Questions

Can I move money between Fidelity account types?

Yes. You can transfer money from a taxable account to an IRA, but it counts as a new contribution and is subject to annual limits. You can also convert a traditional IRA to a Roth IRA, though you will owe taxes on the amount converted. Fidelity can walk you through the steps.

What if I do not have earned income?

You can only open a taxable brokerage account. IRAs require earned income (wages, self-employment income, or alimony) in the year you contribute. If you are a minor with a job, you can open a Roth IRA with your earnings.

Can I withdraw from my IRA before retirement?

From a Roth IRA, you can withdraw your contributions anytime without penalty. From a traditional IRA, early withdrawals are taxed as income plus a 10% penalty, with some exceptions like first-time home purchase or medical hardship. A taxable account has no withdrawal restrictions.

Do I need to open an account right now?

No. You can research account types and open one when you are ready to invest. Fidelity does not charge a fee to open an account or to hold cash in one.

What if my income changes during the year?

IRA contribution limits and deduction phase-outs are based on your income for the full year. If you think your income will be above the limit, you can still contribute to a traditional IRA and then convert it to a Roth, or just use a taxable account. Talk to a tax professional if your income is close to the phase-out range.