Deciding where to put your money can be complicated. If you're trying to balance where your funds should be for the best financial benefit, you may be wondering if it's possible to have too much money in your brokerage account.
The reality is, unlike other kinds of financial accounts, you can't really go wrong with a bigger brokerage account balance. However, while you want to put as much money into a brokerage account so you can invest in the market, you don't want to end up with more risk than you should take on.
So while it's not really a problem if you have a big brokerage account balance, it can be a problem to have money invested with a broker when it should be accomplishing some other task.
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Here's why you can't have too much money in your brokerage account
Putting your money into a brokerage account allows you to invest in stocks. You can buy shares of individual companies if you want. Or you can opt to purchase exchange-traded funds (ETFs), which are traded like stocks but track the performance of a broader financial index (which can make them easier to invest in).
The stock market has historically been the best way for average people to invest because you can usually earn a pretty good return over time with minimal risk if you make smart investments, such as buying shares of an S&P 500 ETF that tracks the performance of around 500 large U.S. companies.
Since you can expect a good return over time if you make informed choices, you can't really have too much money in your brokerage account. After all, you want as much money as possible earning the highest possible returns. This is different from, say, keeping your money in a high-yield savings account. If you put too much in savings, you end up capping your potential returns in a way that can hurt your wealth-building efforts because you can only earn so much on that cash, depending on your account's APY.
You can have too much in a savings account
Say, for example, you have $50,000 in a brokerage account earning a 10% average annual return over 30 years. (This is in line with the stock market's average annual return over the last 50 years.) That $50,000 would turn into $872,470 over 30 years. If you instead kept it in a high-yield savings account and earned just a 4% average annual return over that same time period, you'd end up with only $162,169.88. It's also important to note that savings account APYs fluctuate, and it's unlikely that you'll see a 4% return over such a long period.
Since you don't want to lose the chance to earn the returns needed to build wealth, you only want to put money in savings that you think you'll need soon and can't take the risk of investing in stocks. So your savings account balance could definitely be too big. A bigger brokerage account balance, though, would just end up allowing you to invest more over time, and you could end up a lot richer as a result.
Some money doesn't belong in an investment account
While investing as much as possible in a brokerage account isn't a bad thing, you could run into problems if you're putting money into one when it is needed for something else.
Your emergency fund and any money you may need in the next three to five years should be in savings rather than in a brokerage account because you need to keep that money safe. You don't have time to wait out a market downturn and recovery if you'll need the cash to make a down payment on a home or fund another large purchase.
If you have money in a brokerage account that you can't risk losing, you should move it to a savings account where it will be safe and accessible if you need it. But if you already have a fully-funded emergency fund, are saving for short-term and mid-range goals, and don't have a lot of high-interest debt you need to pay back, then you're good to go and can put as much of your spare cash into a brokerage account as possible without worrying about a large balance.
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FAQs
Investing in a brokerage account can help you build wealth. You can earn a better return in a brokerage account than in most other assets, so you can't have too much money in one. However, you do need to maintain the right asset allocation, which means you need to have a sufficient amount of money in savings too.
Is there a limit to how much money you can have in a brokerage account? ›
There are no contribution limits on taxable brokerage accounts. You can invest as much as you want in any year. But for retirement accounts, there are some limits. The amount you can contribute to your retirement account depends on the type of account it is and your age.
Is it safe to keep more than $500,000 in a brokerage account? ›
They must also have a certain amount of liquidity on hand, thus allowing them to cover funds in these cases. What this means is that even if you have more than $500,000 in one brokerage account, chances are high that you won't lose any of your money even if the broker is forced into liquidation.
How much money should be in a brokerage account? ›
Determining how much money to put into a brokerage account largely depends on how much income you have available and what short-term and long-term goals you have. A good rule of thumb to follow is not to put any money in your brokerage account that you'll need within the next two to five years.
Should you keep all your money in a brokerage account? ›
If you've got a large chunk of cash, you might secure better returns outside of a brokerage account. You could lose money. If your money is swept into a money market fund, that cash won't be insured by the FDIC or SIPC. It's possible to lose money.
Is it safe to keep millions in a brokerage account? ›
However, it may not be the best idea to keep more than $250,000 in cash at a specific brokerage firm. “But when your money's fully invested, you do not have a risk,” Clark says. Beyond that, investing through a company that charges you high or even moderate fees is much more likely to impact your long-term wealth.
Do I pay taxes on withdrawal from a brokerage account? ›
When you earn money in a taxable brokerage account, you must pay taxes on that money in the year it's received, not when you withdraw it from the account. These earnings can come from realized capital gains, dividends or interest.
Where do billionaires keep their money? ›
Common types of securities include bonds, stocks and funds (mutual and exchange-traded). Funds and stocks are the bread-and-butter of investment portfolios. Billionaires use these investments to ensure their money grows steadily.
What happens to my money if Charles Schwab goes out of business? ›
And the SIPC protections are activated in the rare event that a broker-dealer fails and client assets are missing. In that situation, SIPC provides up to $500,000 worth of protection against any of those missing assets, including $250,000 in cash against uninvested cash balances.
Are brokerage accounts safer than banks? ›
While bank balances are insured by the FDIC, investments in a brokerage account are covered by the Securities Investor Protection Corporation (SIPC). It protects investors in the unlikely event that their brokerage firm fails.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
Is it better to invest in a 401k or brokerage account? ›
Brokerage accounts are taxable, but provide much greater liquidity and investment flexibility. 401(k) accounts offer significant tax advantages at the cost of tying up funds until retirement. Both types of accounts can be useful for helping you reach your ultimate financial goals, retirement or otherwise.
Does money grow in a brokerage account? ›
A brokerage account is a key part of your financial plan, as investing in markets is one of the best ways to achieve long-term growth. It's important that you work with a company or person you can trust, because it's your money and you are investing in your future.
What is the downside to a brokerage account? ›
Cons of Brokerage Accounts
Depending on the type of assets you hold in your brokerage account, you may owe capital gains taxes, dividend taxes, or other taxes on your holdings.
How risky is a brokerage account? ›
They Involve Risk
(FDIC) or National Credit Union Association (NCUA), your money is guaranteed up to $250,000 per person, per financial institution. The SIPC insures member brokerage accounts if your brokerage fails, but it doesn't protect against losses if your investments decline in value.
Can you use a brokerage account like a savings account? ›
In brokerage accounts, not only can you invest in stocks, bonds and funds, you can often use the account as an omnibus financial account. In other words, you can write checks and pay bills with your account, often while collecting interest, too.
What brokerage do most millionaires use? ›
Best Brokers for High Net Worth Individuals
- Charles Schwab - Best for high net worth investors.
- Merrill Edge - Best rewards program.
- Fidelity - Best overall online broker.
- Interactive Brokers - Great overall, best for professionals.
- E*TRADE - Best web-based platform.
Cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC). The insurance provided by SIPC covers only the custodial function of a brokerage: It replaces or refunds a customer's cash and assets if a brokerage firm goes bankrupt.
Is SIPC as safe as FDIC? ›
Unlike the FDIC, SIPC does not provide blanket coverage. Instead, SIPC protects customers of SIPC-member broker-dealers if the firm fails financially.
