Pros and Cons of Brokerage Accounts - Experian (2024)

In this article:

  • What Is a Brokerage Account?
  • Pros of Brokerage Accounts
  • Cons of Brokerage Accounts

Opening a brokerage account can be an easy way to invest in stocks, bonds and other securities, either on your own or with guidance from the brokerage. Brokerage accounts are more accessible investment accounts than other options, such as retirement funds, but they also have their downsides, including fees and taxes.

What Is a Brokerage Account?

A brokerage account is an account you can use to invest in securities such as stocks, mutual funds, exchange-traded funds (ETFs), bonds and more. You can use a brokerage account to build wealth and save for financial goals, such as retirement, home remodeling, a child's wedding or other major expenses.

After opening and funding a brokerage account with an investment brokerage, you can either make your own investment decisions, buying and selling stocks yourself; use a robo-advisor to choose investments for you; or have a human financial advisor manage your investments.

Assuming you're already fully funding an employer-sponsored retirement account such as a 401(k) or individual retirement account (IRA), have an emergency fund and don't have excessive credit card debt, a brokerage account can be a useful addition to your financial portfolio. But there are advantages and disadvantages to be aware of before you open a brokerage account.

Pros of Brokerage Accounts

Brokerage accounts offer several advantages that can help you make the most of your money.

Allow Easy Diversification

Brokerage accounts give you the freedom to allocate your investments based on your financial goals and risk tolerance. Diversifying your portfolio by investing in a mix of assets (such as stocks and bonds), as well as buying investments in a range of locations and industries, can help reduce risk and minimize any negative impact of market ups and downs.

Relatively Liquid

Although your money isn't quite as accessible as it would be in a checking account, a brokerage account lets you withdraw cash whenever you like without paying a penalty (though if you're cashing out investments, it'll trigger capital gains taxes). In contrast, withdrawing money from tax-advantaged investment accounts such as 401(k)s, 403(b)s or IRAs before age 59½ can trigger income taxes plus a 10% penalty on the amount you withdraw.

Easy to Open

You can generally open a brokerage account online or in person in a matter of minutes by providing your personal information, annual income, tax status and tolerance for risk. You may even be able to open a brokerage account with no money.

No Required Minimum Distributions

Tax-advantaged retirement accounts usually require you to start taking required minimum distributions (RMDs) at age 72 and pay income taxes on them (unless you're withdrawing money from a Roth IRA). If you don't take your RMD, the amount you should have withdrawn will be taxed at 50%. Brokerage accounts don't require RMDs.

No Contribution Limits

Retirement accounts cap the amount you can contribute each year, which can limit your investments' potential for growth. For 2023, you can contribute a maximum of $22,500 to a 401(k) or 403(b) plan and $6,500 to a Roth or traditional IRA. People 50 and up can make additional catch-up contributions of $7,500 for a 401(k) and $1,000 for an IRA. You can put as much as you want into a brokerage account.

Accounts Are Typically Insured

Brokerage firms that are members of the Securities Investor Protection Corporation (SIPC), which includes most brokerages registered with the Securities and Exchange Commission (SEC) insure your account for up to $500,000 should your brokerage go out of business. Half of that, or $250,000, can be used to cover cash. Keep in mind, however, your money is not insured against investment losses.

Cons of Brokerage Accounts

Brokerage accounts have some downsides to consider.

May Charge Fees

You are likely to encounter a variety of fees when you open a brokerage account and purchase investments. These can include annual fees, account maintenance fees, management or advisory fees, and fees for purchasing or selling investments.

They're Taxable

Some tax-advantaged retirement accounts don't tax your deposits; instead, you'll pay taxes when you take distributions in retirement. Brokerage accounts tax you on earnings when they are realized, which usually happens when an investment is sold or a dividend paid.

They Involve Risk

When you put money into a traditional or high-yield savings account insured by the Federal Deposit Insurance Corp. (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. Purchasing investments inherently involves risk. You'll need to strike the right balance between safer investments that typically deliver lower returns and riskier investments that have the potential for a bigger payoff (and bigger losses) to ensure your investments are diversified.

May Have Minimum Deposit and Balance Requirements

Although some brokerages let you open accounts for free, others require an initial minimum deposit, which could be thousands of dollars. You might also have to maintain a certain balance in your account to avoid maintenance fees.

The Bottom Line

You can build a foundation of financial security by contributing to your workplace or individual retirement account, paying down debt and building a solid emergency fund. If your budget allows, opening a brokerage account can be a convenient way to expand your options. Weigh the pros and cons of opening a brokerage account before making your decision.

Purchasing investments doesn't affect your credit scores unless you open a margin account. With this kind of brokerage account, you can borrow money from the brokerage to purchase stock. The brokerage may check your credit when you apply for a margin account, which could cause a small, temporary drop in your credit score. If the value of your investments drops too far, you might struggle to repay the money you owe the brokerage. Should your account be sent to collections, it could damage your credit score. You can avoid this risk by opening a cash account, which doesn't involve borrowing money.

Pros and Cons of Brokerage Accounts - Experian (2024)

FAQs

What are the pros and cons of a brokerage account? ›

Opening a brokerage account can be an easy way to invest in stocks, bonds and other securities, either on your own or with guidance from the brokerage. Brokerage accounts are more accessible investment accounts than other options, such as retirement funds, but they also have their downsides, including fees and taxes.

Do brokerage accounts affect credit score? ›

Buying stocks and other types of investments doesn't directly affect your credit report or credit scores. However, applying for a margin account—an investment account that has a line of credit—might impact your credit.

Should I keep all my 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.

What are 2 benefits to using a brokerage? ›

Your brokerage account can help you with:
  • Trading stocks.
  • Long term investing.
  • Retirement savings.
  • Other savings goals.

What are 2 negatives to using a brokerage? ›

Brokerages typically don't have cash-handling employees in brick-and-mortar locations. Brokerage accounts don't offer all the services that a traditional bank offers. Brokerages might not offer additional products such as mortgages and other loans.

Are brokerage accounts a good idea? ›

For example, if you want to buy a house with cash or save up a very large down payment, a brokerage account might be a good option if you plan to save for about five years. But for savings goals that will take less than five years, you might want to use a regular savings account or a money market account.

How risky is a brokerage account? ›

Is My Money Safe in a Brokerage Account? Cash and securities in a brokerage account are insured by the Securities Investor Protection Corporation (SIPC).

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.

Are brokerage accounts high risk? ›

Yes, brokerage accounts are generally a safe place to keep your money. However, that doesn't mean that they're without risk. The protection offered by SIPC is limited to $500,000 per customer per brokerage firm. This coverage includes up to $250,000 protection for cash within the account.

How much money is too much for a brokerage account? ›

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.

How much cash should you keep in a brokerage account? ›

A general rule of thumb is that cash or cash equivalents should range from 2% to 10% of your portfolio, although the right answer for you will depend on your individual circ*mstances.

How much cash should I leave in my brokerage account? ›

At the least, you should have enough cash to keep your emergency fund fully flush. That means enough cash to cover expenses for six moths, should you need it. Many investors keep as much as 20% to 30% of their portfolios in cash.

Do you pay taxes on brokerage accounts? ›

Brokerage accounts are taxable accounts

The act of opening a brokerage account doesn't mean you'll be on the hook for any additional taxes. But brokerage accounts are also called taxable accounts, because investment income within a brokerage account is subject to capital gains taxes.

Can I pay bills from a brokerage 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.

Is it safe to link bank account to brokerage account? ›

Checking account linking is generally safe when you use the right investment platforms. Do your research before sharing your credentials!

How much money should I keep in my 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.

Are you taxed when you withdraw from brokerage account? ›

Taxable Accounts

They offer fewer restrictions and more flexibility than tax-advantaged accounts such as individual retirement accounts (IRAs) and 401(k)s. Unlike an IRA or a 401(k), you can withdraw your money at any time, for any reason, with no tax or penalty from a brokerage account.

Do I have to pay taxes on a brokerage account? ›

Many people falsely believe that any gains or income earned in a taxable brokerage account are not taxable until withdrawn, but that isn't the case. You'll pay taxes on brokerage account income in the tax year you earn it.

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