Types of Accounts for Your Exchange-Traded Funds

By Russell Wild

The first question you have to answer when opening an account from which you can trade your exchange-traded funds (ETFs) is whether it will be a retirement account or a non-retirement account.

If you want a retirement account, you need to specify what kind (IRA? Roth IRA? SEP?). A non-retirement account is a simpler animal. You don’t need to know any special tax rules, and your money isn’t committed for any time period unless you happen to stick something like a CD into the account.

The next question you have to answer is whether you want to open a margin account or a cash account. A margin account is somewhat similar to a checking account with overdraft protection. It means that you can borrow from the account or make purchases of securities (such as ETFs, but generally not mutual funds) without actually having any cash to pay for them on the spot. Cool, huh?

Unless you have a gambling addiction, go with margin. You never know when you may need a quick (and, compared to credit cards, inexpensive) and potentially tax-deductible loan.