The 5 Different types of investments

While there are many different types of investments they typically fall into one of five categories. It should be stated that any investment is better than no investment. In fact if you are not investing any money in any way at all the different types of investments might not be the first consideration for your financial plan. Learning how to save money might be a better question to ask. Once a habit of saving money is established then considering the different types of investment make more sense.

Regardless of the type of saver you are, answering the question of where should I put my money begins best with at least a cursory understanding of the different types of investments. Each has its own properties and the different type of investments have different benefits. And while some will argue this next point the list below is displayed in order of preference. Each successive different type of investments in the list is more powerful than its predecessor.

The Five Categories of Different Types of Investments

Tax-able: Taxable investments mean that anything that is earned from the investment (interest or dividends). These investments can include simple interest on checking or savings accounts to money invested in mutual funds or stocks that are NOT part of a tax qualified plan.

Tax-deferred: There are essentially two different types investments that can be tax deferred. One allows money to be placed before any taxes of any kind are taken, the other accepts money that has already been taxed (usually as regular income). Regardless of the type the benefit is that interest gained in these accounts do not have capital gainst tax applied (pre-tax-deferred accounts have benefit of avoiding income tax when placing the funds as well as the capital gains deferment). It is important to understand that these investments are not tax free. The different types of investments that are tax deferred ultimately have a tax requirement; typically on withdraw of the funds.

Tax-free: There are different types of investments that do offer returns on a tax free basis. That is the structure of the vehicle is such that the value of the investment is treated differently that other different types of investment. Some insurance vehicles fall into this category. The gain on the investment is tied to the value of the policy rather than the interest performance.

Tax-free and tax-deductable: Mortgage interest is tax deductable, but real estate obviously carries with it a notable tax burden in at least property tax. However structuring equity in a home can allow it to actually be invested in one vehicle that falls into the tax free category, while continuing to provide the tax shelter offered by the mortgage interest deduction.

Tax-free, tax-deductable and tax credit: While not necessarily a different type of investment vehicle, there are effective investments methods that allow gain to avoid being taxed, include a tax deduction (similar to the mortgage interest deduction above), but also provide the ability to apply applicable tax credit. We’ll discuss more of these in detail along our journey because while each different type of investment mentioned previously is fairly standard, a tax-free, tax-deductable and tax credited investment requires a little more orchestration.