Taxable Brokerage Account: What Is It, Working, Importance, And More

January 11, 2024

taxable brokerage account

Opening a taxable brokerage account is one of the first steps you need to take before you start investing. You will need to use the brokerage account to trade your investment assets. These assets include bonds, stocks, mutual funds, and ETFs. It is simple to set up a brokerage account, and you can complete your application within minutes. If you are saving for short-term goals, brokerage accounts are great options.

In this article, you will learn about taxable brokerage accounts in general and how it works. Here, we will have a comprehensive discussion of how this brokerage account works. In addition to that, you will also learn about when to invest in a brokerage account. Finally, we will discuss the pros and cons of brokerage accounts. Hence, to learn more, read on through to the end of the article.

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What Is A Taxable Brokerage Account?

According to Investopedia,

A brokerage account is an investment account held at a licensed brokerage firm. An investor deposits funds into their brokerage account and the brokerage firm transacts orders for investments such as stocks, bonds, mutual funds, and exchange-traded-funds (ETFs) on their behalf. The assets in investment accounts belong to the investors, who normally must report as taxable the income derived from the account.”

To open a brokerage account, an investor should choose the investment firm based on the need for investment. Some investment firms will charge you a flat fee based on the size of your account. On the other hand, some investment firms charge commissions on each execution of trade.

However, there is a difference between traditional brokerage firms and online brokerage firms. Online brokerage firms charge lower fees. Hence, these firms are best for investors who like to conduct their own research, transactions, and trades.

Unlike retirement accounts, taxable brokerage accounts do not provide immediate tax savings or tax-deferred growth. However, they are still one of the most versatile tools for an investor. Here, you will have the freedom to build your investment portfolio the way you want.

How Does A Taxable Brokerage Account Work?

NerdWallet states –

You can open a brokerage account quickly online. You generally do not need a lot of money to do so. In fact, 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.

In a brokerage account, you can transfer money just like you do in a regular bank account. However, unlike a bank account, a brokerage account will give you access to the stock market and other investments. These accounts are taxable because the investment income is subject to capital gains taxes. However, there are tax advantages in brokerage accounts, too.

Depending on what your taxable income is, your long-term capital gains tax rates are 0%,15%, or 20%.

In your brokerage account, you are the owner of the money and investments. Furthermore, you can also sell your investments at any time if you own a brokerage account. In the buying and selling process, there is a broker who acts as a middleman between you and your investments.

Apart from that, you must also know that there is no limit on the number of brokerage accounts an investor can have. Moreover, there is also no limitation on the amount of money that you can put into a taxable brokerage account every year. In many cases, there are no fees to open a brokerage account.

When To Invest In A Taxable Brokerage Account?

You must consider opening a taxable brokerage account when:

  1. If you have enough cash in your savings account. Also, by opening the account, you will have a variety of investment options.
  2. You can open a brokerage account if you have made maximum savings in your retirement account (as per IRS limits).
  3. If you want liquidity in your account, you can open a brokerage account.
  4. A taxable brokerage account also gives you better control over your taxes.
  5. With a brokerage account, you can also leave enough assets for your heirs.

Pros And Cons Of Taxable Brokerage Accounts

According to the Forbes Advisor,

You can open a new brokerage account in a matter of minutes, provided you have the funds to make the initial deposit. […] A brokerage account is a key part of your financial plan, as investing in markets is one of the best ways to achieve long-term growth. It’s important that you work with a company or person you can trust, because it’s your money and you are investing in your future.

The following are the major pros and cons of taxable brokerage accounts:

Pros Of Taxable Brokerage Account

Here are the major pros of a brokerage account that will benefit you as an investor:

  1. Money withdrawal without penalty is easy.
  2. The assets inside a brokerage account can qualify for lower capital gains tax rates.
  3. You have greater control over your tax bill as you can also carry forward your capital losses.
  4. You can put in as much money as you like, as there is no contribution limit.
  5. There is the freedom to invest in any type of security you want.
  6. On the date of the death of the owner, the beneficiaries can step up the cost basis to the fair market value.

Cons Of Taxable Brokerage Account

Here are a few cons of a brokerage account that you need to be aware of:

  1. There are annual taxes for income received (investment earnings and capital gains).
  2. There are no tax deductions for the money you put into the account.
  3. Taxable brokerage accounts do not get legal protection.

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Wrapping Up

Hope this article was helpful for you in learning essential details about taxable brokerage accounts. It is an investment account that you can open at a brokerage firm. Here, you can use the account to buy and sell investment securities.

One of the best things about these accounts is that you have the freedom to buy and sell various types of securities. What is your opinion on taxable brokerage accounts? Consider sharing your ideas and opinions with us in the comments section below.

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Soumava Goswami

A passionate writer and an avid reader, Soumava is academically inclined and loves writing on topics requiring deep research. Having 3+ years of experience, Soumava also loves writing blogs in other domains, including digital marketing, business, technology, travel, and sports.

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