The amount of investors using brokerage accounts has increased in recent years as savers look to maximize emergency funds. Read on to learn what a brokerage account is, the pros and cons of using one, and if it could be right for you.
What is a Brokerage Account?
A brokerage account is a taxable investment account that allows you to buy stocks, bonds, mutual funds, index funds, and other assets with money that you deposit into your account. You open the account with an investment company or brokerage firm, generally fee-free. The firm then places investment orders on your behalf and executes trades, and typically collects a commission.
Pros of Brokerage Accounts
Though the initial setup of a brokerage account is similar to retirement accounts like a 401(k) and Roth IRA, brokerage accounts are more flexible in that they don’t apply income or contribution limits, and they offer a variety of investment options and the potential for market growth. Too, there is no limit to the amount of brokerage accounts you can have, and investors can withdraw their money at any time, an attractive option among savers.
Cons of Brokerage Accounts
Unlike retirement accounts like IRAs and 401(k)s, which offer tax benefits, investors utilizing brokerage accounts pay taxes when they sell assets or when a stock pays dividends. 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.
Is a Brokerage Account Right for You?
In addition to the fact that the funds in a brokerage account can complement an emergency savings account, brokerage accounts are generally recommended for investors whose goals are more than five years away but closer than retirement, such as if you’re saving for a down payment on a house. Because brokerage accounts are taxable, it’s recommended that you have a sizable emergency savings and you max out your retirement accounts before opening a brokerage account.
How to Open a Brokerage Account
First, do your research before choosing an account provider, paying attention to what each broker charges for the type of investments in which you’re interested (i.e. if you want to trade stocks, find a broker with low trade commission). If you’re a newbie, you might want to consider a discount broker, which typically offers low minimums and access to customized advice. Next, transfer funds into the account. Finally, buy investments based on interests plus research culled from the broker and your own legwork, bearing in mind that the amount of money you have to invest will play a role in selecting investments. For example, share prices for company stock differ by company. If you’re interested in growing your investments from this point, you can set up automated transfers to your brokerage account.
Brian Brammer, CPA and partner of Brammer & Yeend Professional Corporation, has been in public accounting since 1989 after graduating from Ball State University with a Bachelor of Science degree in accounting. Brian provides services to small businesses and individual clients in tax, accounting, business development, forecasts and financial analysis.
