What Is a Brokerage Account? (2024)

Retirement

Investing

Types of Investments

12 Min Read | Jan 4, 2024

What Is a Brokerage Account? (1)

By Ramsey

What Is a Brokerage Account? (2)

What Is a Brokerage Account? (3)

By Ramsey

While your 401(k) at work and a Roth IRA are thebestways to save for retirement, they’re not theonlyways to invest. That’s where a brokerage account comes in.

Under the right circ*mstances, brokerage accounts (or taxable investment accounts) can give your nest egg a bigger boost beyond your tax-advantaged retirement accounts.

We always recommend investing in your 401(k) and IRAfirstbecause they offer tax benefits that you can’t find anywhere else. But when you’ve maxed out those options, a brokerage account might provide you with a place to keep investing. Here’s what you need to know!

What Is a Brokerage Account?

A brokerage account is an investment account you can open directly through a bank or brokerage firm that lets you buy and sell all kinds of different investments. With a brokerage account, you have the freedom to invest in whatever you want—from stocks and mutual funds to bonds and ETFs.

They’re also known astaxable investment accountsbecause the money that grows in your account will be taxed by Uncle Sam.

How Do Brokerage Accounts Work?

It’s pretty simple: When you want to invest in mutual funds or stocks through a brokerage account, you’ll place an order through the account, deposit the funds, and then the transactions will be carried out for you by the bank or brokerage firm.

There are two main types of brokerage accounts you can choose from: full-service brokerage accounts, which come with some type of financial guidance, or an online brokerage account that you basically manage yourself or with help from a “robo-advisor” (more on those below).

With a brokerage account, you get no tax benefits. Zilch.Instead, you’ll pay taxes on anycapital gains, dividends and interest you earn in your account. Let’s break that down a little more!

When you sell investments inside your brokerage account, you’ll pay capital gains taxes on any money you make from the sale . . . but how much you pay is based on how long you owned the investment.

For example, if you bought shares of a mutual fund and held them for a year or longer before selling, you’ll pay the long-term capital gains rate (0%, 10% or 15%, depending on your ordinary income). But if you bought and sold those shares in less than a year, then you’ll be charged at the short-term capital gains rate (which is the same as yourincome tax rate).1

If you receivedividendsfrom your investment, they will be taxed either at your ordinary income tax rate (for unqualified or “ordinary” dividends) or at your long-term capital gains rate (forqualified dividends) in the same year you received them.

Phew!We know . . . that was a lot to take in. Trying to calculate what you owe in taxes on a brokerage account can get complicated, so you’ll probably want towork with a tax advisorwho can help you sort it all out.

Types of Brokerage Accounts

There are several types of brokerage accounts you might come across when looking for one. Here’s what you need to know about each type so that you can pick one that’s right for you.

Full-Service Brokerage Accounts

A full-service managed brokerage account usually comes with help from afinancial advisoror a broker. These accounts are usually more expensive since these brokers will charge a fee or commission for making trades or purchases on behalf of their investors.

Online Brokerage Accounts

Online brokerage accounts are made for the do-it-yourself investor. They come with lower fees, but you’re pretty much on your own when it comes to buying and managing your investments.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

Some online brokerage accounts now come with help from “robo-advisors,” which rely on computers and algorithms instead of humans to help build and manage your investment portfolio based on your preferences.

Cash Brokerage Account

With a cash brokerage account, any investments you buy must bepaid in full.That means you’re not allowed to borrow any money from a broker to pay for any investment transaction. That’s a good thing, because it prevents you from turning your brokerage firm into a debt collector. Speaking of which . . .

Margin Brokerage Account

Whenever you hear the wordmargin, thinkdebt. A margin account lets you borrow money from the brokerage firm or bank in order to make trades—you’ll basically be going into debt to invest. That’s a disaster waiting to happen! Because if you borrow money to invest and the value of that investment tanks, the broker you borrowed money from could demand you cover that loss right away.

Listen to us,neverborrow money to invest. Not only is it extremely risky, but you’ll also have to pay interest on what you owe.

Make an Investment Plan With a Pro

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How to Open a Brokerage Account

Is opening a brokerage account tough to do? Not at all! In just a few easy steps, you can have a brokerage account opened up in no time at all. There are just a few things to keep in mind along the way. Here’s what you need to do:

1. Pick a brokerage firm.

Take some time to compare the costs, fess and services offered by a few brokerage firms before deciding which one is right for you. Ask your investment professional about your options before deciding where to invest your hard-earned cash.

2. Choose the type of brokerage account you want.

According to TheNational Study of Millionaires, most millionaires work with a financial advisor to help them reach their net worth and they don’t use debt to invest. With that in mind, steer clear of margin accounts at all costs!

3. Fill out an application.

Once you find a brokerage firm you want to open an account with, opening a brokerage account is a pretty simple process that just takes a few minutes to complete.You might need to sign some forms and provide some personal information, like your Social Security number, employment status, net worth and more.

4. Fund the account and start investing.

After you’ve set up your account, you can make an initial deposit or even set up automatic withdrawals from your bank into that investment account each month. Once your account is funded, you can start investing. It’s as easy as that!

What’s the Difference Between Brokerage Accounts and Retirement Accounts?

Feature

Traditional 401(k)

Roth IRA

Brokerage Account

Eligibility

Only available through an employer-sponsored program and there may be a waiting period before enrollment.

Must have an earned income, but restrictions apply after a certain income based on your filing status.

Some brokerage firms will require a minimum investment to open an account, but there are no restrictions based on income.

Taxes

Investments are made with pretax dollars, lowering your taxable income. But you’ll pay taxes on any money you withdraw in retirement.

Investments are with after-tax dollars, allowing investments to grow tax-free.

Plus, no taxes on withdrawals in retirement. Win-win!

Generally, you will have to pay capital gains taxes when you sell investments through your account. Any dividends and interest you receive will also be taxed in the year you received them.

Contribution Limits

For2024, $23,000 per year ($30,500 per year for those 50 or older).

For 2024, $7,000 per year ($8,000 per year for those age 50 or older).

There are no restrictions on how much money you can invest into your account.

Investment Menu

Account is controlled by a third-party administrator who handles (and limits) investment options.

A wider variety of investment options and more control over how you invest.

You can buy and sell investments through your broker, who may offera wider range of investment options, including stocks, mutual funds and bonds.

Withdrawals

Penalties for withdrawals before age 59 1/2.

Penalties for withdrawals before age 59 1/2.

You can take money out of your account at any time without paying fees or penalties.

When it comes tosaving for retirement, there are some major differences between brokerage accounts and tax-advantaged retirement accounts like a 401(k) and Roth IRA. The main difference (and it’s a big one) is how they are taxed.

Brokerage accounts don’t have the same tax benefits as retirement accounts.

With a brokerage account, you don’t get to claim your contributions as tax deductions like you could with your traditional 401(k). And you don’t enjoy tax-free growth or tax-free withdrawals that come with a Roth IRA. That makes brokerage accounts a much less attractive retirement savings option than those tax-advantaged accounts.

Listen, wealwaysrecommend maxing out your traditional and Roth retirement accounts before you even consider opening up a brokerage account for retirement savings.

Now, although brokerage accounts don’t have the same tax benefits as tax-advantaged retirement accounts, they do come with fewer restrictions and rules. Here are some of the main benefits of having a brokerage account.

Brokerage accounts have more flexibility.

You can take money out of a brokerage account atany timeand forany reason—just like you could with a regular bank account—without paying an early withdrawal penalty. You have to wait until age 59 1/2 to take money out of a 401(k) or IRA without penalty.

Again, max out your retirement accounts first, but brokerage accounts can be used in situations like “bridge accounts” for early retirement or other situations where you need access to the funds.

Brokerage accounts have no contribution limits.

You can put as much money as you want into a brokerage account. You’ve already paid income taxes on the money (from your paycheck), so the government doesn’t care about how much you invest. (And besides, the government will hit you with capital gains taxes later, so they’ll get their taxes anyway.)

The IRS, meanwhile, sets limits on how much you can put into a 401(k) or IRA each year.

Brokerage accounts have no income limits.

It doesn’t matter if you make $25,000 a year or $250,000—anyone can open up a brokerage account and put money in one. You can’t contribute to a Roth IRA if your income rises above a certain level.

In summary:Brokerage accounts are more flexible than retirement accounts, but don’t have some of the same tax advantages.

When Should I Consider Opening a Brokerage Account?

Great question! Keep in mind thatworking with a financial advisorwho can give you guidance on the pros and cons of opening a brokerage account inyoursituation isalwaysa good idea.

Now, here are four scenarios where a brokerage account might play a big role in helping you reach your financial goals:

1. You maxed out your 401(k) and IRA contributions.

First things first: Werecommend you invest 15% of your gross income into tax-advantaged options like your 401(k) and Roth IRA. But if you’ve maxed out your tax-advantaged options andstillhaven’t invested 15% of your gross income, you can use a brokerage account to help you hit that mark.

For 2024, you can put up to $23,000 in a 401(k) and $7,000 into your IRA. If you’re age 50 or older, you can put in “catch-up contributions” that allow you to invest $30,500 in a 401(k) and $8,000 into an IRA this year.2,3Make sure you focus on investing as much as you can inthoseaccounts before turning to a brokerage account. You don’t want to miss out on those tax benefits!

Just like with your 401(k) and IRA, werecommend spreading your investments in a brokerage account acrossfour different types of mutual funds: growth and income, growth, aggressive growth, and international.

2. You’re looking to invest beyond 15% of your income.

We want you to dream for a second. Imagine you just made your last mortgage payment and now you’re sitting in a paid-for house. If you had a typical mortgage payment, that means you might have an extra $1,600 every month to work with!3

Having a paid-for house opens up a lot of possibilities for you, like investing beyond 15% of your gross income so that you canreallyrun up the score and squirrel away a huge pile of savings for retirement. A brokerage account might be an option, especially if you want to bump up your retirement by a few years. Speaking of which . . .

3. You want to retire early and avoid early withdrawal penalties.

A lot of Americans dream aboutretiring early, but the early withdrawal penalty they might get hit with for taking money out of a 401(k) or Roth IRA before age 59 1/2 makes them think twice about it.

To avoid giving Uncle Sam a huge chunk of your nest egg, you might want to set up a brokerage account as a “bridge account” that will give you an income stream to tap into until you’re able to pull from your 401(k) and IRAs. Since you can take money out of a brokerage account at any time and for any reason, they’re perfect for bridging that gap!

4. You have long-term savings goals that you’re saving for.

Brokerage accounts don’t have to be just for retirement! They can also help you reach some important financial goals that might take a long time to reach. 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. You won’t earn very much on those accounts, but you won’t be vulnerable to short-term market swings.

Work With an Investment Pro

Still have questions about brokerage accounts? It’s worth scheduling a meeting with an investment professional who can walk you through the pros and cons of opening up a brokerage account based on your situation.

Our SmartVestor program can help you find an investment professional in your area who can walk you through all of your investing options so you can make the best decision for your future.

Find an investment pro today!

Next Steps

  • Did you know that about 7 out of 10 millionaires (68%) worked with a financial advisor to build their net worth?4 Our SmartVestor program can help you find a pro in your area who can help you invest your money for retirement.
  • If you’re looking for ways to invest beyond retirement, you have plenty of options available—from investing in real estate to taking advantage of a Health Savings Account (HSA).
  • Investing in a brokerage account means you’ll have to pay capital gains taxes on any earnings you make on your investments. That’s why you should reach out to a tax pro who can help you understand the tax implications of investing with a taxable investment account.

This article provides generalguidelines about investingtopics. Your situation may beunique. If you havequestions, connect with aSmartVestorPro.RamseySolutions is a paid, non-clientpromoter ofparticipating Pros.

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About the author

Ramsey

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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What Is a Brokerage Account? (2024)

FAQs

What does a brokerage account do? ›

A brokerage account is an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs. Whether you're setting aside money for the future or saving up for a big purchase, you can use your funds whenever and however you want.

What is the downside to a brokerage account? ›

Downsides of a standard brokerage account

Since it's a taxable account, you'll have to pay taxes on earnings in your account, including capital gains and dividends.

Can I withdraw money from a brokerage account? ›

Yes, you can pull money out of a brokerage account with a bank account transfer, a wire transfer, or by requesting a check. You can only withdraw cash, so if you want to withdraw more than your cash balance, you'll need to sell investments first.

Does a brokerage account make you money? ›

Brokerage accounts are used for day trading to earn short-term profits, as well as investing for long-term goals. Most brokerage accounts also provide a way to earn a decent yield on uninvested cash. A broker maintains your brokerage account and acts as the custodian for the securities you own in your account.

Are brokerage accounts a good idea? ›

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.

How much money do you need for a brokerage account? ›

That means you could open a brokerage account and start investing with whatever funds you have—whether that's $100 or $1,000. These investment accounts allow you to purchase stocks, bonds, exchange-traded funds (ETFs), mutual funds and other securities. You might even earn interest on your uninvested cash.

Is it better to put money 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.

How risky is a brokerage account? ›

Brokerage accounts are insured by SIPC up to $500,000 but the insurance doesn't cover the payback from your investments. It only covers missing assets if the broker goes down. If customer assets aren't missing, the SIPC insurance isn't needed.

Is your money safer in a bank or a brokerage account? ›

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. However, certain rules and conditions apply—and investment earnings are not insured.

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 is the safest type of investment? ›

What are the safest investments? 7 low-risk places to put your money — and what makes them so
  • Certificates of deposit (CDs)
  • US Treasuries.
  • Money market funds.
  • AAA-rated corporate bonds.
  • Blue-chip stocks.
  • ETFs with bond or blue-chip portfolios.
  • Fixed-rate annuities.
Jan 3, 2024

Why is Roth IRA better than brokerage account? ›

Roth IRA contributions are not tax deductible, but qualified withdrawals are completely tax-free. In addition, Roth IRA investments are not subject to capital gains or dividend taxes, meaning they'll grow faster than they would in a taxed account.

Does opening a brokerage account affect your credit score? ›

Most investment accounts do not show up on your credit report. So, opening an investment account will generally not affect your credit score. Whether you are buying stocks with a credit card or investing by depositing cash into your account, your balance and investment performance will not impact your credit score.

Why would I want a brokerage account? ›

Brokerage accounts have more flexibility.

You can take money out of a brokerage account at any time and for any reason—just like you could with a regular bank account—without paying an early withdrawal penalty. You have to wait until age 59 1/2 to take money out of a 401(k) or IRA without penalty.

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.

When should you use a brokerage account? ›

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.

What are the benefits of owning a brokerage? ›

Benefits Of Becoming A Real Estate Broker
  • More career options.
  • One of the main reasons someone might want to get a broker's license is if they wish to operate and/or own their own real estate brokerage. ...
  • More Money. ...
  • Associate Brokers Are Seen As More Trustworthy And Experienced. ...
  • Agents Have Fewer Licensing Requirements.

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.

How much tax do you pay on a brokerage account? ›

"The sale of an investment held for greater than one year is treated as long-term capital gains and subject to taxation at long-term capital gains tax rates that, like qualified dividends, are taxed at a favorable rate that can range from 0% to 20%."

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