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What are Long Term Investment Accounts?


Long Term Investment Accounts

Long-term investment accounts are used by investors as a way to earn returns that will be realized at some point in the future. Investors in these types of accounts are generally not concerned with earning money that will be used right away. Instead, the purpose of these accounts is saving for some need in the future.

Long Term Investment accounts

Long Term Investment accounts, Numbers And Finance—kenteegardin (Flickr.com)

 Types of Long Term Investing

Retirement investing is one of the most common types of long-term investing, and there are a number of retirement accounts that are available. For example, you could put your money into a 401(k), IRA, Roth IRA or some other retirement account. With the 401(k) and the IRA, you get to put money aside on a pre-tax basis, which allows you to set aside more money for retirement. Then when you retire, you’ll pay taxes on the amount that you take out of the account.

By comparison, with the Roth IRA, you save money on and after-tax basis. Then when you hit retirement, you don’t have to pay taxes on any of the money that you take out of the account. With either of these types of accounts, you can avoid paying taxes on investment gains while the money is in the account. This makes it possible to grow your portfolio over the long-term without having to worry about paying taxes on the money as you make it.

Other possible long term investments would be saving for a down payment on a house or saving to put your kid through college. Although there are no tax advantaged accounts available for saving for a down payment, there are tax advantaged accounts for saving for college. One of the best programs available is a 529 savings plan. See College Savings Accounts for more information.

Choosing the Right Type of Long Term Account

When you are investing for the long-term, certain types of investments are more suitable than others. Some investments are designed for short-term returns, while others work better over the long-term.  For instance,  banks are currently paying such low interest rates that they are not suitable for long term investment since the interest won’t even cover the loss of purchasing power due to inflation over the long term.

On the other hand, if you are interested in long-term returns, putting money into certain equities makes sense. When you invest in the stock of a company that is poised for growth over a period of several years, this can provide you with returns for years to come.

When you invest in the right stocks, you will earn returns from the growth in the market price of the stock, and from dividends. This gives you some regular income over the long-term, and it provides you with the opportunity to grow your wealth at the same time.

If you do not like the idea of having to pick individual companies for your investment portfolio, you may want to invest in growth mutual funds. There are a number of mutual funds out there that invest in companies that are poised to grow over an extended period of time. When you put money into these funds, the mutual fund managers use your money to buy shares of stocks of companies that meet their investment criteria. At that point, you own a portion of every stock that the portfolio buys. Then when those stocks grow in value or pay dividends, you benefit. This provides you with an easy way to invest for the long-term without having to do a lot of research on individual companies by yourself.

Long-Term Investment Account Strategies

Besides picking individual investments, you also need to take a long-term approach to investing. There are certain investment strategies that cater to making short-term profits, and some that are centered around long-term profits. For example, if you use a day trading strategy where you own shares of a stock for less than a day before selling them for a minor profit, you are not investing for the long-term. You are instead trying to make money on a short-term basis.

By comparison, if you buy stocks and then hold them for several years, this is a more long-term investment strategy. If you plan on being a long-term investor, you’re going to have to be comfortable with the fluctuations of the market. You can’t sell all the shares in your portfolio as soon as something bad happens and the market starts to decline. The market will go up and down. If you plan on being a long-term investor, you have to keep the end goal in mind instead of worrying about what will happen in the short-term market.

Tax Considerations

When using long term investment accounts and strategies, it is important to understand how the taxes will be handled. Investing for the long-term is actually encouraged by the tax rules. If you hold an asset and sell it in less than a year, you will pay a higher capital gains tax rate. If you hold the asset for longer than a year, you will pay capital gains taxes at a lower rate. This means that if you are investing for the long-term, you will eventually pay less money in taxes on those gains. If your money is in a retirement account, you will not have to worry about capital gains taxes on the earnings at all. With this benefit in place, long-term investing can make a lot of sense for anyone.

See Also:

Investing in a Mutual Fund

About the Author:

Chris Keenan is a blogger for a new jersey bankruptcy attorney, writing on a variety of finance topics from personal finance to business employer of record.

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