As you start gaining interest in investing money, you may come across information about opening a brokerage account.
And while you might be investing for retirement in a 401k already, you might not be as familiar with the term “brokerage account” at all.
Typically, this type of account is opened through a financial firm online and provides you with a few set of services and investment options.
But before you dive into a brokerage account yourself, I wanted to cover everything you need to know to make an informed decision.
Feel free to use the table of contents to jump to any desired section.
Table of Contents
What is a Brokerage Account and How Does It Work?
The definition of a brokerage account is quite simple.
This type of specific account allows you to purchase and sell investments. You can open one of these accounts through an investment company like Vanguard or even through your bank.
The money you deposit and any investments in your brokerage account you own. Essentially, the broker you opened an account with acts as the go-between for you and any investments you wish to purchase.
Within your brokerage account you’ll have access to stocks, bonds, mutual funds, and other types of assets like CDs, money market funds, etc.
How a brokerage account works
Once you decide where you want to open a brokerage account, you can get started easily online. The process usually asks a few questions and to verify your identity.
Another option you have is to transfer money from a brokerage account to another. There is not set a limit to how many brokerage accounts you have, not that you would need multiple accounts.
How much money do you need to open a brokerage account?
You generally do not need a lot of money to open a brokerage account, although each financial firm may have different minimum terms. So make sure to research that before opening one.
Some brokerage accounts have no minimum just to open one, where others may require an initial deposit of $1,000 or more.
And if you want to start purchasing investments, obviously you will need money funded to the account anyway.
Do I need to pay taxes on my brokerage account?
Before we move on to the next section, there is one more area you must understand.
Standard brokerage accounts are taxable accounts. Any interest, dividends, or capital gains you make off your investments during a given year, will be taxed.
If you suffer any losses with your investments, there are some tax benefits to you, which can lower your overall taxable income.
If you open an IRA or Roth IRA, those are considered tax-advantage brokerage accounts.
Is My Money Safe in a Brokerage Account?
Yes, your money is safe in a brokerage account! Of course, there is potential for losses pending what assets you are investing in.
But from an account perspective, your financial broker is registered with the SEC and should be a member of SIPC.
This means, your money is insured up to $500,000 in missing brokerage funds if your financial company goes out of business. Some brokers even get additional insurance above that for your protection.
Always ensure before opening a brokerage account, you are aware of what safety features and insurance they provide for you as the investor.
For example, here is Vanguard’s brokerage protection statement:
Is A Brokerage Account the Same As A Savings Account?
Not quite. While brokerage accounts and savings accounts both help you save and generate returns on your money, they do serve different purposes.
Choosing what to do really depends on your current personal finances, how much you have saved and are saving, etc.
Your savings account should be used to build your emergency fund or potentially for an upcoming big purchase.
Your bank or online bank account should be FDIC insured, which protects your money up to $250,000.
With your savings account, there is no risk of losses, you’ll gain some interest on your money, and you can access the cash quickly if needed.
However, savings accounts aren’t going to help you build wealth nor are interest rates in most banks that great to begin with. At some point, you may want to start putting more money to work.
Taxable brokerage account
At some point, you might have a great buffer for an emergency fund (6+ months of expenses) and you might be maxing out your retirement accounts (IRA or 401k). This is a pretty great situation to be in.
For example, my company does not offer a 401k yet, so I have a Roth IRA. Considering the contribution limits are much lower, I max this out quickly.
My savings is also at a great level, so I funnel a good portion of what I save to my traditional brokerage account.
This might be something you want to do, especially if you know you probably won’t need this money for 5+ years. The reason you want to put money in a traditional taxable brokerage account is to potentially get a higher return on your money.
Can you use a brokerage account as a savings account?
Typically, you would not be using your brokerage account as a savings account.
You want the money you need to be quickly accessible and to be safe from market fluctuations.
While there are options in your traditional brokerage account to help safeguard your money, these two types of accounts should be looked at and used differently from one another.
Should I Set Up a Brokerage Account?
So one question you might ask yourself is if you should set up a brokerage account. I will always say yes to this question, but which specific accounts will vary.
For example, even if you have a company 401k you can still open an IRA within the broker you chose and contribute.
Always invest in your company 401k enough to get the company match (if one is offered) before investing in an IRA.
But since IRA’s have tax advantages and are for your future retirement, it’s no doubt a must.
However, opening a traditional taxable brokerage account is a completely different story. As I mentioned earlier, I think you need to have a few things in place:
- Emergency fund already well stacked
- Investing in your company 401k or maxing out your IRA
- Stable job and income (or even a strong side hustle)
If you can check off these items, then opening a taxable brokerage account might be for you. This is something I have done and actually took a portion of my emergency fund to invest.
Reason being, I had too much in my savings account (again, a great “problem” to have). It was wasting away in my traditional savings account, accumulating a fractional percent of interest.
Instead, I took that portion into the taxable account. Then I split a portion into the Vanguard Money Market Fund and then invested in two different tax-managed funds.
That way, they would accumulate interest and dividends, while also keeping my tax bill low from those gains. Again, this was my personal choice and may not work specifically for you.
The Best Brokerage Account Providers
That was quite a bit of information, but hopefully it’s all making sense. Now, let’s say you want to open a brokerage account right now.
Whether that is for a taxable account or a retirement options, you might then be wondering what is the best provider for you.
Again, this is typically a personal decision based on your finances, but I can offer you some tips and providers I like.
Here’s what to look for:
- Account minimums and platform fees
- Security and money protections
- Types of account options and investments
- Historical performances of funds
- Platform and invest reviews from other users
- Financial history of the brokerage company
- Website and apps access/usability
Plus, the type of company you want will depend on what your investing goals might be.
For example, you might be looking to day trade, might just looking to invest long-term, or maybe automated assistance from a robo-advising brokerage provider.
But here are a few of the best brokerage account providers to consider:
How do I Open A Brokerage Account?
Setting up your brokerage account online is really quite simple and only takes a few minutes to set up. When I opened my taxable brokerage account and a Roth IRA, it took about 10 minutes.
For any brokerage account you want to open, you’ll need to be 18 in the united states to open one. But, if you are younger you can open an account but will need your parents or guardian to do so.
As you get started, you’ll follow the prompts and enter the required information. And once your investment account is open, you’ll want to connect your bank account and transfer funds over.
Some financial companies may have you do that in the initial set-up process if they require a minimum deposit to get started.
After your money is transferred, it might take a few days to clear within your account. However, the money can be used to start purchasing any investments right away. Viola!
Hopefully this in-depth brokerage account for beginners guide answers all, if not most of your questions.
As you can see from above, there is quite a bit to know.
But the overall process of getting your brokerage accounts set up and being able to invest is quite easy, especially online.What questions do you have about brokerage accounts? Do you have a favorite in mind? Anything I missed that you think should be included? Let me know in the comments below!