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What is a brokerage account?
A brokerage account is an investment account from which you can purchase investments such as stocks, bonds and mutual funds. You can add money to a brokerage account similar to the way you deposit funds into a bank account. Brokerage accounts have no contribution limits or early withdrawal penalties. They offer flexibility but lack the tax benefits found in retirement accounts.
» Already know the basics? Learn how to open a brokerage account
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How do brokerage accounts work?
You can open a brokerage account quickly online. Many brokerage firms allow you to open an account with no up-front deposit. However, you will need to fund the account before you buy investments. You can do that by moving money from your checking or savings account, or from another brokerage account.
You own the money and investments in your brokerage account, and you can sell investments at any time. The broker holds your account and acts as a middleman between you and the investments you want to buy.
There is no limit on the number of brokerage accounts you can have, or the amount of money you can put into a taxable brokerage account each year. There should be no fee to open a brokerage account.
» View our picks for the best brokerage accounts
How to choose a brokerage account provider
There are two main options for where to open a brokerage account: online brokers and robo-advisors. Both offer retirement accounts and taxable brokerage accounts.
"You want to be careful with which company you open your brokerage accounts with," says Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland. "And you should be walking in with an awareness of what you’re going to be investing in. You want to do a little research."
Online brokerage account
If you want to purchase and manage your own investments, an online brokerage account is for you. An account with an online brokerage company enables you to buy and sell investments through the broker’s website. Discount brokers offer a range of investments, including stocks, mutual funds and bonds.
Managed brokerage account
A managed brokerage account comes with investment management, either from a human investment advisor or a robo-advisor. A robo-advisor provides a low-cost alternative to hiring a human investment manager. These companies use computer programs to choose and manage your investments for you, based on your goals and timeline.
Robo-advisors may be a good fit for you if you’d like to be largely hands-off when it comes to your investments. We have a full list of the best robo-advisors.
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🤓Nerdy Tip
It generally isn't wise to invest money you need within the next five years. If you’re saving for a short-term goal, skip the brokerage or investment account and consider these options for short-term investments.
How to open a brokerage account
Setting up a brokerage account is simple. You can typically complete an application online in under 15 minutes. (In most states, you’ll need to be 18 to open your own account. Here’s how parents can set up a brokerage account for their kids.)
Once you've opened the account, you’ll need to deposit or transfer funds. That sounds complicated, but these days, it’s pretty simple to link your bank account with a brokerage account online.
Some brokers make you verify a transaction. If that’s the case, you’ll have to wait until the broker deposits a small sum in your bank account — typically a few cents. Then you’ll confirm the transaction by telling the brokerage the exact amount that was deposited. If you have any questions, the broker can walk you through the process. After the transfer is complete and your brokerage account is funded, you can start investing.
You might be asked if you want a cash account or a margin account. A margin account allows you to borrow money from the broker in order to make trades, but you'll pay interest and it's risky. Generally, it's best to stick with a cash account at first.
» Looking for some guidance to start investing? Here's how to invest in stocks
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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. Retirement accounts (such as IRAs) have a different set of tax and withdrawal rules. They may be better for retirement savings and investing.
"A lot of people think that brokerage accounts are 'non-tax advantaged,' but there are tax advantages," said Delyanne Barros, founder of Delyanne The Money Coach.
"The benefit of the brokerage account is leveraging the long-term capital gains tax," she said in an email interview. "In order to do that you must be a long- term investor. That means you have to hold your investments for over a year. Not only will this help you capture the most favorable tax bracket, but it will likely result in better returns." Depending on your taxable income and filing status, the long-term capital gains tax rate is 0%, 15% or 20%.
The key to reaping a brokerage account's advantages, Barros said, is to stay invested, ignore the day-to-day stock market noise, "and go live your life." Here are five brokerage account tax tips to keep in mind.
If you buy stock through a brokerage account, you’ll probably have to pay capital gains tax if you sell it for a profit later.
If you sell a stock a year or less after buying it, you may have to pay the the short-term capital gains tax. It's usually your ordinary income tax rate, and often higher than the long-term capital gains rate.
If you sell an investment for a loss, then you can use that loss to offset some of your gains and reduce your capital gains tax burden.
If the stock or fund you buy through a brokerage account pays dividends, you’ll have to pay taxes on those dividends even if you choose to reinvest them. If this is the case, your brokerage will send the relatively uncomplicated DIV-1099 tax form to include in your tax return.
If you invest through a retirement account, you typically won’t have to worry about any of this.
Brokerage accounts vs. IRA accounts
In a standard brokerage account you're contributing post-tax money. In most cases, your investment earnings will be taxed. On the plus side, there are very few rules for brokerage accounts. You can pull your money out at any time, for any reason, and invest as much as you’d like.
In a Roth IRA, you also contribute post-tax money. Once you reach 59½ and have held your account for at least five years, you can take withdrawals, including earnings, without paying additional taxes.
"Ideally, you should have both, but prioritizing the Roth IRA is best so you can grow your money tax-free," said Barros.
Moyers also says the ideal situation is to have both, but it depends on your goals. An IRA is a good way to save money for retirement. But, she says, you are tying your money up for a long time.
"If you want to save money to buy a house, a brokerage account would be more appropriate," she says.
If you want to invest for retirement, you might want to open a retirement account rather than a taxable brokerage account. (Here are our picks for the best IRA accounts.)
You might already be investing for retirement through your work. Many companies offer an employer-sponsored plan such as a 401(k) and match your contributions. You can still open an IRA, but we recommend contributing at least enough to your 401(k) to earn that match first.
The table below compares brokerage accounts with retirement accounts.
Brokerage account | Retirement account | |
|---|---|---|
Taxes | May incur capitals gains tax on investment income; investments sold 1 year or less after buying are subject to ordinary income tax | Typically no capital gains; tax-deferred or tax-free growth |
Contributions | Unlimited | Caps on annual contributions |
Withdrawals | No limits or penalties | Penalties for withdrawing before a certain age, unless exceptions are met |
Used primarily for | Stock trading, options trading, additional long-term investments after maxing out retirement accounts | Long-term growth, retirement savings |
Frequently asked questions
Is there a minimum to open a brokerage account?
Most brokers don’t require an account minimum to get started. Remember, though, that an account minimum is different from an investment minimum. An account minimum is an amount you would need to deposit into the brokerage account just to open it. An investment minimum might be found in a mutual fund — there are some funds that require a minimum of $1,000 or more to invest. However, you can typically find low- or no-minimum funds at many brokers.
Should I open an IRA or a brokerage account?
Whether you should open an IRA or taxable brokerage account first depends on your situation and investment goals. Financial planners often recommend, first and foremost, to contribute at least enough to a company’s 401(k) plan to earn the company’s match, if that’s a possibility.
If not, then it may make sense to open an IRA before a brokerage account, as IRAs come with considerable tax advantages and are built for long-term growth. If you have an IRA and are already maxing it out, and either don’t have access to a 401(k) through work or already contributing enough to at least get your company’s match, then a brokerage account could be the next step.
Can I take money out of my brokerage account?
There are a few levels to getting money out of your brokerage account. If it’s invested in stocks, you’ll have to sell those stocks first. Then, once the money is available as cash in your account (which, these days, happens fairly instantaneously), you’ll still likely have to wait a few days before you can withdraw that cash. Once the trade “settles,” you can withdraw the cash, which can take another few days for the cash to appear in your bank account.
So, under normal circ*mstances, there shouldn’t be any problem getting cash out of your brokerage account, but keep in mind that it could be several days before it’s actually available in your bank account. For brokerages that offer cash management in addition to brokerage services, this process is much faster.
