Table Of Contents
- A brokerage account is used to invest in assets like stocks and bonds.
- A brokerage account may be ideal for you if you’d like to contribute more to investments but have maxed out other accounts.
- Most brokerage account providers are similar, but we like M1 Finance and Charles Schwab.
- Beginners should hold off on opening a brokerage account, unless they already have a solid balance in their retirement account.
- Taxes on investment gains are simple, unless you sell an asset less than a year after you purchase it.
What Is A Brokerage Account?
A brokerage account is a type of investment account used to trade assets like stocks, bonds, ETFs, and mutual funds. The main difference between a brokerage account and other investment accounts like a 401(k)s is that a brokerage is taxable, while other investment accounts get a tax break.
For example, if you contribute to a 401(k), you won’t have to pay taxes on your earnings until retirement. You’ll also receive a tax deduction on the amount you contribute each year.
With a brokerage account, you’ll pay taxes on earnings in the year they were earned. You also won’t receive a tax deduction for any contributions. Brokerage accounts also have no contribution limit, as where retirement accounts do.
Why Should You Open A Brokerage Account?
It makes sense to open a broken account if you already have a strong investment strategy for retirement, within a retirement account like a 401(k) or SEP IRA. It may also make sense if you’ve maxed out your retirement contributions but want to invest more.
If you don’t have a strong investing strategy for retirement, start there.
Choosing A Brokerage Account
Most brokerage account providers are similar, so pick the platform you find easiest to use. Beyond that, consider whether you’d prefer a robo advisor or a self-directed investment strategy.
With a self-directed investment strategy, you’ll need to pick the stocks, bonds, or ETFs you’d like to invest in. You can then buy and sell investments through the broker’s website.
With a robo-advisor, a computer program will select investments for you in the background. Typically, you’ll provide a bit of information on your investment goals, and the program will pick investments that are likely to help you reach those goals over time. A robo-advisor is ideal for newer investors and for people who’d prefer a hands-off approach.
If you prefer a robo-advisor, check out M1 Finance ($500 minimum) or Schwab Intelligent Portfolios ($5,000 minimum). If you prefer a self-directed portfolio, check out companies like Fidelity, TD Ameritrade, and Charles Schwab (no minimum required).
Opening A Brokerage Account
The process to open a brokerage account will vary depending on the account provider you choose. Generally speaking, though, the setup process will take less than 15 minutes. You’ll need to provide basic information — like your name, address, and bank account information — to open the account.
Funding A Brokerage Account
After opening the account, begin to transfer funds and build your portfolio. There are two options to fund your account: mail a check to your broker or link your bank account for an automatic transfer.
If you opt for a self-directed portfolio, you’ll need to select the investments you want your money to go towards. If you opt for a robo-advisor, this is the part of the process where you’ll want to complete the questionnaire about your investment goals. The location of this questionnaire will vary depending on the platform you use, but if you run into trouble, just reach out to the broker directly.
Most investment accounts have an option to set up automatic, recurring transfers. This is the easiest way to continue funding your account consistently. However, if you’re concerned about overdrafting your bank account by mistake, it’s better to manually transfer funds when you have it.
Frequently Asked Questions (FAQs)
What Is The Best Brokerage Account For Beginners?
As a beginner, it’s simplest to open a brokerage account at the same account provider as your retirement account. Managing multiple accounts on one platform can simplify the process. If you don’t have a retirement account provider yet, consider one of this month’s top accounts for robo-advisors or stock trading.
How Do Taxes Work On A Brokerage Account?
If you open a brokerage account, purchase stocks, and hold them for the long term, you’ll only need to pay taxes on the dividends you earn that year. The account provider will issue you a DIV-1099 tax form, which you’ll file alongside your other tax documents.
When you sell the stocks down the line, you’ll be subject to capital gains tax. This is a tax on any profit you make from selling an asset.
Beware though, if you purchase a stock then sell it for a profit less than a year after purchasing it, you may have to pay the ordinary income tax rate on the profit, which can be significantly higher than capital gains tax.
What Are The Requirements For A Brokerage Account?
To open a brokerage account, you’ll need the following information:
• Your name
• Social security number (or taxpayer identification number)
• Telephone number
• Email address
• Date of birth
• Driver’s license, passport, or another form of government-issued identification
• Employment status and occupation
• Annual income
• Net worth
You’ll also need to be 18 years or older to open your own account.