Having a brokerage account is the first step to building your investment portfolio. If you want to save up for college, retirement, or large purchases, a brokerage account is a good way to work toward these goals.

In this article, we’ll cover the following:

• Types of brokerage accounts
• The pros of brokerage accounts
• The cons of brokerage accounts
• How to choose a brokerage firm
• How to open a brokerage account
• The difference between a brokerage account and other investment accounts

Types of brokerage accounts

There are two main types of brokerage accounts: cash brokerage accounts and margin accounts. The primary difference between the two is how they are funded and the risk associated with each type of account.

• Cash accounts: A cash account is funded by the cash you have in your account. Investment purchases are based on and limited to the money in the account, so if you have $2,500 in cash, investments are limited to that amount. The upside of this type of account is that it presents less risk to the investor, but the downside is that borrowing funds is not permitted, and returns are smaller.
• Margin accounts: A margin account allows you to borrow funds from the brokerage firm you opened your account with to purchase investments—the investments you purchase become collateral for the loaned money. The upside of this type of account is that you can utilize more complex trading strategies, purchase more investments, and have the potential for greater returns. The downside to this account is that it presents a higher risk; you’re responsible for paying interest on the loan, and the brokerage firm can sell any of your investments to cover an account deficit.

Within the category of cash or margin accounts, you have subcategory options to consider. These subcategories may determine what type of financial guidance you will receive for your brokerage account investments or where you will ultimately open your account.

• Online brokerage accounts: An online brokerage account is opened and managed from a website or mobile app. These accounts are best for those comfortable with financial planning, strategizing, selecting investments, and executing trades independently. However, most online brokerages have research and analysis tools to help inform decision-making. One of the benefits of online brokerage accounts is that fees may be less, with many charging a small per-transaction commission or no commission at all.
• Discount brokerage accounts: A discount brokerage account is a less hands-on investment approach. These firms tend to charge lower fees because they don’t provide as many services as a full-service firm. The benefit of a discount brokerage account is that you still have access to real-life brokers who may provide services that are helpful to investment decision-making.
• Robo-advisor accounts: a robo-advisor account has an algorithm, not the investor, select the investments without any human participation. However, investments with robo-advisors are typically restricted to ETFs or mutual funds. Costs for asset management are lower compared to full-service brokerage firms, and minimum balance requirements can sometimes be as low as $0.

The pros of brokerage accounts

Easy to open

Brokerage accounts can be opened in just a few simple steps, taking only minutes of your time. Depending on the brokerage firm and type of account you select, you may not even have to leave the comfort of your own home or have a minimum balance to start. All you need to provide is some personal information, and you’re on your way to building your investment portfolio.

Diversification

Brokerage accounts allow you to diversify your portfolio by investing in a mix of securities and buying in various industries and locations. Diversification can reduce risk and even mitigate the negative impact of market highs and lows.

Many brokerage firms are registered with the Securities and Exchange Commission (SEC) through the Securities Investor Protection Corporation (SIPC), which means their accounts are typically insured for up to $500,000 should the brokerage fail. Half the insured amount can cover cash, but insurance does not cover investment losses.

Nearly liquid

While funds in a brokerage account aren’t as easy to access as a checking account, you can withdraw cash at any time without penalty. However, keep in mind that cashing out investments does trigger capital gains taxes. Brokerage account funds are more accessible than other investment accounts, like 403(b)s, 401(k)s, or IRAs, which can trigger income taxes plus incur a 10% penalty if withdrawn before age 59.5.

No contribution limits or required minimum distributions

Unlike retirement accounts, brokerage accounts don’t have contribution limits, so you can put as much funds as you want in the account. Brokerage accounts don’t require minimum distributions, which would cause the investor to pay income tax on the money or be taxed 50% for failing to withdraw.

The cons of brokerage accounts

Risk

While many brokerage firms insure their accounts for up to $500,000, that insurance does not cover investment losses. Purchasing any investment involves some level of risk. Some are higher than others, so you will need to balance between safer investments that provide lower returns and riskier investments that have the potential to produce bigger gains.

Taxes

Brokerage accounts typically tax on earnings when realized, so usually when a dividend is paid, or an asset is sold. There are other types of investment accounts, like retirement accounts, that don’t tax deposits. However, those accounts do require distributions to be taken in retirement, which are taxed.

Fees 

Depending on the brokerage firm, you will likely incur fees for their services, including managing your investments. Fees can include account maintenance, advisory, annual, and purchasing/selling investment fees. The cost of the fees varies from provider to provider. Typically, full-service firms have higher fees, and online brokerages have lower fees.

Minimum deposit and balance requirements

Most brokerage firms will require a certain amount when opening a brokerage account, referred to as a minimum deposit. You may be able to avoid the minimum deposit if you go with a robo-advisor account; some don’t have this requirement. In addition to minimum deposits, many accounts require a certain balance to avoid penalties. Balance requirements affect how much money you can withdraw from the account at any given time.

How to choose a brokerage firm

Many types of brokerage account providers exist, from traditional brokerage firms to app-based or online brokerages. Your financial needs will help determine where to open your brokerage account.

To make an informed decision on a brokerage firm, here are four factors to consider:

• Financial advice: The level of guidance you need or desire will play an integral part in deciding where to open a brokerage account. Full-service firms actively manage brokerage accounts, providing expert advice on financial planning, investment strategy, and more. Online brokerages are a little less hands-on but offer Robo-advisors who can match you with investment options based on your goals and risk profile.
• Investment options: What you would like to invest in can help narrow the list of brokerage firms based on what they offer. While most will provide stocks, bonds, and varied funds, some offer cryptocurrency, real estate, currency, and commodities.
• Fees: All brokerage firms charge fees to open an account, but the amount of the fees varies from provider to provider. Typically, the more involved they are in managing your account, the higher the fees will be. Therefore, online or app-based brokerages with robo-advisors charge comparatively less.
• Minimum balance: Brokerage firms may require a minimum amount of funds to open an account, and some may require the account to be maintained with a certain balance. What those minimum balances are will vary from provider to provider.

Key points about brokerage firms:

• Financial and investment needs will help determine what brokerage firm suits those needs.
• Full-service firms may charge through commissions on trades or with a flat fee
• Full-service brokerage firms may charge higher fees, but they provide advisory services.
• Online brokerages offer lower fees if you prefer to do your own research, trades, and account transactions.
• Online brokerages offer the convenience of 24/7 access to your account.
• Robo-advisors provide services using algorithms, such as planning, investing, and portfolio management.

How to open a brokerage account

After you’ve selected a brokerage provider, the process of opening a brokerage account is completed in a few easy steps. Whether opening an account in person or online, you’ll need to provide the type of account you want to open, some personal information, and answer questions about your financial needs and investment preferences.

Brokerage firms require specific personal information from investors to comply with federal and state laws and regulations.

If you’re unsure what you need to provide, here is the information to have ready when opening your brokerage account:

• Your legal name
• Social security number (SSN) or tax identification number (TIN)
• Driver’s license, passport, or government-issued photo ID
• Physical address/phone number/email address
• Employment information
• Financial data (annual income, net worth, investment objectives, risk tolerance)

Once your account is open and your profile created, you must fund your account with at least the minimum deposit required. 

The difference between a brokerage account and other investment accounts

There are quite a few differences between a brokerage account and other investment accounts, including investment type, income limits, contribution limits, investment options, and tax advantages.

Brokerage accounts vs. savings accounts

While savings accounts can accrue interest the longer funds stay in the account untouched, they differ in three key ways from brokerage accounts.

• Risk: Savings accounts are Federal Deposit Insurance Corporation (FDIC) insured, and no investments with potential losses are made through the account, so they present less risk.
• Returns: Savings accounts accrue interest at whatever rate the financial institution offers. Brokerage accounts use funds to purchase securities that have the potential to increase value and earn dividends, allowing for bigger gains.
• Purpose: Savings accounts are typically used for short-term financial goals, while brokerage accounts are for mid-to-long-term goals.

Brokerage accounts vs. retirement accounts

Retirement accounts include Roth accounts, individual retirement accounts (IRAs), and 401(K)s are different types of investment accounts with different criteria and functions than brokerage accounts.

• Access: Retirement accounts have strict mandates on how to invest your money and when you have access to those funds. Brokerage accounts allow for total control over the amount you invest, the securities you invest in, and the withdrawal of funds.
• Purpose: Retirement accounts are long-term only, requiring the account holder to be at least 59.5 to access their funds without penalty. Brokerage accounts allow you access whenever without penalty, making it more suitable for mid- and long-term financial goals.
• Contributions: Certain retirement accounts, like 401(k)s and IRAs, allow your employer to match contributions to the account. The investor entirely funds brokerage accounts.
• Tax advantages: If account holders stick to the rules for accessing retirement accounts, they have the potential to pay less taxes. Brokerage accounts don’t provide any tax advantages, but they do have the potential to help pay a lower capital gains rate when selling securities.

Ready to invest in your future?

If you want to invest in stocks, bonds, and other securities, a brokerage account is essential. Licensed brokerage firms like Stash can help you open and maintain a brokerage account that serves your mid- to-long-term financial plans. Whether you’re working toward goals six, fifteen, or thirty years down the road, establishing a brokerage account is the first step toward building a healthy, diversified portfolio.

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The post What is a Brokerage Account, and How Do I Open One? appeared first on Stash Learn.

Even if you have a retirement account, like a 401(k) or an IRA, opening a separate brokerage account may provide another avenue to building wealth over time. While retirement accounts often limit contributions and have penalties for early withdrawals, brokerage accounts give you total control over how much you invest and when you withdraw your funds. That allows you to work toward both mid-term goals, like a home purchase, or long-term aims, like having more money when you retire. 

 In this article, we’ll cover:

1. Choosing a brokerage firm
2. Brokerage account types
3. Required information to open your account
4. Funding your account

1. Find a brokerage firm based on your needs

According to the Financial Industry Regulatory Authority (FINRA), there are more than 3,000 brokerage firms in the United States, from brick-and-mortar offices to online and app-based options. So how do you find the right one for your needs when the pool is so large? First, consider how managing your investments fits into your lifestyle. You might want to think about factors like the following:

• Convenience: Do you prefer to sit down face-to-face with a broker, or would you rather access your account online anytime? 
• Investing style: Do you crave active management from an individual at a brokerage firm, or are you more interested in a passive investment strategy?
• Investment objectives: What’s the time horizon for your financial goals, i.e., the length of time you plan to hold your investments? 
• Risk profile: All investing involves risk, including the risk that you could lose money. How aggressive or conservative do you want to be in your investment choices? 

These considerations are important when you’re learning how to start investing, and they can give you a sense of what you want from a brokerage firm too. As you research your options, you’ll want to find out about the investment options, brokerage fees, level of support, and options for fractional shares offered by each brokerage you’re considering. 

Investment options you’re interested in

You can put your money into a wide variety of types of investments, and you’ll want to choose a brokerage that offers the kinds that interest you. Most firms offer several options, but you won’t necessarily find every investment class at each one. The most common securities you’ll find on offer are: 

• Stocks
• Bonds
• Mutual funds
• Index funds
• Exchange-traded funds (ETFs)
• Crypto

While most people associate investing with financial instruments like stocks and funds, brokerage firms may also give you options for putting your money into other investment vehicles like real estate or commodities. All securities have different levels of risk and potential reward, so reflect on your investing style, objectives, and risk profile to decide on the investments that appeal to you. 

Brokerage fees and commission

You’ll generally pay some sort of fees on your brokerage account, and they vary from broker to broker. Full-service brokerage firms tend to have the highest fees, while online brokers and robo-advisors usually charge less. Sometimes you’ll pay a commission on each transaction, but even brokers that advertise commission-free trading may charge for other things, such as:

• Management or advisory fees
• Expense ratio fees
• Sales load fees
• Monthly or annual subscription fees

In addition to researching the pricing schedule of any brokerage you’re considering, find out if there’s a minimum amount of money you need to open your account and whether you must maintain a minimum account balance. 

Additional factors to consider

While what you can invest in and how much you’ll pay in fees are major considerations when choosing a brokerage, there are several other features that can make all the difference in your satisfaction as an investor. The resources and options a brokerage provides affect your investing confidence, ability to get the support you need, and how accessible certain stocks and funds are for your budget. 

• Investor education: Whether you’re new to investing or have some experience under your belt, it pays to have information on your side. Brokerages that provide educational resources want you to understand your investments and succeed in building wealth, and you’ll become better at managing your overall financial picture as you learn. 
• Robo-advisor option: It takes a lot of time, energy, and investment savvy to research, purchase, and manage your investments alone. And paying a live financial advisor to make decisions for you can eat into your returns. Robo-advisors can provide an affordable and convenient way to put together a portfolio that’s right for your needs. 
• Customer service: Whether you’re working with a full-service firm or an online broker, excellent customer service means fewer frustrations and more confidence. From investing advice to troubleshooting your account, knowing you can easily reach out and count on a prompt, thorough response to questions can be a valuable feature of the brokerage you choose.
• Fractional shares: Purchasing full shares of certain stocks can be cost-prohibitive; some of the most popular go for thousands of dollars per share. Fractional shares, or smaller parts of full shares, help make investing more accessible to the average person. 

2. Choose your brokerage account type

Once you’ve researched and chosen your brokerage firm, you’ll need to decide what type of brokerage account you’d like to open: a cash account or a margin account.

• Cash account: The amount you can spend to purchase securities is limited to the amount of money in your account. You’re not allowed to borrow funds from your broker to pay for transactions. Cash accounts are very straightforward, because you only spend what you have, and they’re generally seen as the least risky option. The downside is that you might miss out on opportunities to invest a larger amount of money than you have on hand in the hopes of a high return. 
• Margin account: This type of account allows you to “buy on margin.” You can borrow money from the brokerage to make investments, and the securities you buy become collateral for your loan. Margin accounts allow for more complex trading strategies and may have the potential for greater returns. However, they’re considered far riskier than cash accounts, because you might have to pay back your debt immediately if the value of your investment falls. The brokerage can even sell off your investments to cover an account deficit. You’re also responsible for paying interest on the loan, and there’s always the chance that the interest will be higher than your returns. 

3. Provide the following personal information to open your account

Once you’ve decided on the what, it’s time for the how. To open a brokerage account with an online firm, you just need to hop on your computer. If you’re going with a brick-and-mortar broker, you may need to set up a phone or in-person appointment. 

Before you get started, gather the info you’ll need to streamline the process. Your brokerage firm will request some personal, financial, and tax identification information from you in order to comply with laws and regulations. Your brokerage should provide a secure way to share this sensitive information. Expect to be asked for the following:

• Your name
• Social security number or taxpayer identification number
• Address, phone number, and email address
• Date of birth
• Information from a government-issued form of ID, like a driver’s license or passport
• Employment status and occupation
• Whether you’re employed by a brokerage firm
• Annual income
• Net worth
• Investment objectives and risk tolerance

Note that you must be at least 18 years old to open a brokerage account. If you’re underage, you’ll need a parent or guardian to open a custodial account for you.

4. Add funds to your investment account

The final step of setting up your brokerage account is adding funds. You can likely make an initial electronic deposit through a linked savings or checking account. You may also be able to wire transfer money, deposit a check, or transfer investments from another broker. You’ll often see any electronically deposited funds in your brokerage account within one business day. Wire transfers should be available within minutes. Check deposits and investment transfers may take several business days to post, so check with your brokerage for more information.

The amount you’ll need to deposit into your account depends on the brokerage. Some require you to start with $1,000 or more. At other firms, you could open a brokerage account with just $100. And some, like Stash, allow you to start investing with just a few dollars. Regardless of your budget, you can find an option that makes it accessible to start building a brighter financial future.

The post How to Open a Brokerage Account appeared first on Stash Learn.

One thing to keep in mind: Investment accounts are not the same as savings accounts at a bank. The assets in any investment account could grow significantly over time, but investing always involves risk, including the risk that you could lose money.

In this article, we’ll cover:

• Brokerage accounts
• Individual retirement accounts
• Employer-sponsored retirement accounts
• Custodial accounts
• Education savings accounts

Brokerage accounts

When people say “brokerage account,” they usually mean a highly flexible investment account that allows you to choose from many types of investments, trade the securities you want to own and withdraw money whenever you wish. Here’s an overview of how they work:

• A brokerage firm, or broker/dealer, is a company offering financial services; you open your account with the brokerage, and they execute trades on your behalf. Brokerage firms come in many forms, from brick-and-mortar in-person service online-only platforms or apps. Your brokerage may offer other services too, like an online robo-advisor or financial advising.  
• A broker is a licensed professional who can trade on your behalf. They work for a brokerage firm and typically charge a commission or other fees for helping to manage your money. You might not necessarily work with an individual broker at your brokerage firm; it’s common for people to use a robo-advisor or manage their investments themselves at online and app-based brokerages.
• A brokerage account is the individual investment account you open with a brokerage firm. You put money into your account, and the brokerage invests it as you wish. If you want to buy or sell any securities, you request the trade and the brokerage enacts it.  If your account earns profits, dividends, or interest, you’ll likely owe taxes on that money 

A point of clarification: almost every type of investment account is held by a brokerage firm, even accounts with more restrictions, like an IRA or a custodial account. That’s because only brokers can interface directly with the stock market. They enable individual and institutional investors to buy and sell securities, like stocks, bonds, exchange traded funds (ETFs), mutual funds, and more. You interact with the brokerage, and the brokerage trades on the stock market on your behalf.

Cash account

Cash brokerage accounts are funded with your money: if you deposit $100, you can invest up to $100. In many cases, you can get started with just a few dollars. You can invest in whatever securities your brokerage offers; in addition to stocks, bonds, and funds, some brokerages offer access to commodities like gold and newer investment vehicles like cryptocurrency. 

Margin account

With a margin account, you can invest your own money, as well as borrow money from your broker to buy securities. You must pay back the loan, plus interest, even if your investments lose value. In some cases, the brokerage can force you to sell your investments to cover your debt. Margin accounts usually represent a significant risk to investors. 

>> Learn more about brokerage accounts 

Individual retirement accounts

Individual retirement accounts (IRAs) are tax-advantaged accounts that help people save for retirement. You can invest your contributions in almost any security, and investment returns grow tax-deferred while they remain in your account. There is typically a penalty for money taken out before age 59½, but there are a few exceptions. There are two main types of IRAs: traditional and Roth. 

>>Learn more about IRAs

Traditional IRA

With a traditional IRA, your contributions may be tax-deductible. This can reduce your taxable income, which might lower your overall tax bill in any given year. Any investment returns accrue tax-deferred and at 59½, you can begin making withdrawals. You’ll typically owe tax on the money you take out. If your tax rate is lower when you withdraw than it was when you contributed, you might reap tax savings. 

If you take out money before age 59½, you’ll have to pay an extra penalty tax unless you qualify for an exception. And when you turn 70½, you’re required to start taking distributions; you’ll owe additional tax if you don’t.

>>Learn more about traditional IRAs

Roth IRA

Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars. Qualified distributions made after you turn 59½, however, are tax-free. That means any money you earn on your investments is also tax-free. If you expect to be in a lower tax bracket earlier in your career and a higher tax bracket close to retirement, a Roth IRA could help you save on taxes. Roth IRAs can also provide more flexibility when it’s time to withdraw, as you may be able to take out your principal investment without penalty prior to age 59 ½, and there are no required minimum distributions like traditional IRAs impose.  

>>Learn more about Roth IRAs

Employer-sponsored retirement accounts

There are a few types of investment accounts offered by employers to help their employees with retirement savings. They typically offer tax advantages, and employers often make a matching contribution on your behalf. These retirement accounts usually have higher contribution limits than IRAs, but investment options tend to be much more limited.

>>Learn more about employer-sponsored retirement accounts. 

401K

A 401(k) plan is a retirement account that can be offered by private companies. Employees commonly contribute with pretax dollars, lowering their taxable income, though Roth and after-tax contribution options may also be available Employers may match employee contributions up to a certain amount, so many employees contribute at least enough to get the employer match. In many cases, these plans have a “vesting” schedule, meaning that employees do not fully own the employer’s contributions until they have worked there for a certain amount of time. 

Money in the account contributed on a pre-tax basis, including any investment returns, is not taxed until it’s withdrawn. If you expect to be in a lower tax bracket when you retire, you might save money on taxes. Funds withdrawn before age 59½ are subject to an extra penalty tax in most cases. Like traditional IRAs, 401(k) plans have required minimum distributions.

Roth 401K

Roth 401(k)s have different tax advantages than standard 401(k)s. Like a Roth IRA, contributions to a Roth 401(k) are made with post-tax dollars, but qualified distributions are tax-free, including investment returns. If you expect to be in a higher tax bracket when you retire, a Roth 401(k) could offer substantial tax savings.

403(b)

Only private employers can offer 401(k) plans. Nonprofits and some government employers can offer a similar plan: the 403(b). 403(b) plans are also called tax-sheltered annuities.

Like 401(k)s, 403(b) plans allow you to make contributions of pre-tax money, and employers often offer matching contributions. You can generally take qualified distributions after age 59½, and will owe taxes on your money at that time; nonqualified distributions come with a 10% penalty. 403(b) accounts also have required minimum distributions.

Custodial accounts: investment accounts for kids

A custodial account is a type of investment account for a child. A parent or other adult is the custodian; this person makes investment decisions and often funds the account. The assets in the account belong solely to the child, but the child cannot withdraw money until they reach the age of majority, which varies from state to state. Nevertheless, the account may be considered the child’s asset in financial aid calculations, potentially limiting the aid available to them. Additionally, any income from a child’s custodial account belongs to the child, so if income exceeds a certain threshold, you’ll need to file a separate federal income tax return for the child. The custodian, however, can use the money for the child’s benefit. 

>>Learn more about custodial accounts 

Uniform Gifts to Minors Act (UGMA)

UGMA accounts are custodial investment accounts that allow an adult to transfer assets to a child without establishing a formal trust. The account can contain stocks, bonds, and other securities. It’s managed by the custodian until the beneficiary reaches the age of majority; at that point, the beneficiary can use the money without restriction. Before that, the custodian can use the money for the child’s benefit. UGMA accounts will likely be treated as the child’s asset for purposes of financial aid, which might lower the amount of aid available. 

While UGMA investment returns are not tax-free, in some cases they are taxed at the minor’s tax rate, or the “kiddie tax,” which may be lower than the custodian’s. Contributions are made with post-tax dollars, but individuals can contribute up to $16,000, and married couples up to $32,000 per year, without triggering gift tax.

Note: UGMA is a federal law that states can adopt. While all states have done so, some have made amendments. You’ll want to learn the details of your state’s UGMA implementation before making investment decisions. 

Uniform Transfers to Minors Act (UTMA)

UTMA largely aligns with UGMA: it allows adults to open a custodial account to transfer assets to children without establishing a trust, requires a custodian, may impact the child’s access to financial aid, and passes to the child without restriction at the age of majority. But UTMA extends UGMA to allow investments in more asset types, including real estate, paintings, patents, and royalties. UTMA also allows some flexibility for gifted assets to reach maturity dates, like bonds, even after the minor comes of age. 

UTMA is another federal law that states can choose to adopt. Most have adopted it, but not all, and some have amended it. It’s important to understand your state’s UTMA before making investment decisions. 

Custodial IRAs

Any individual can contribute to an IRA if they have earned income. Thus, children with earned income can fund IRAs to get a head start on retirement planning. Other people can contribute on the child’s behalf, as long as the total does not exceed the child’s earned income. A child’s IRA, however, must be set up as a custodial account.

Custodial IRAs can be traditional or Roth, and the contribution tax rules are the same as adult IRAs. For children, Roth IRAs can be especially attractive because contributions are made with post-tax dollars, at a time when a child’s tax rate is likely low. Then any investment returns grow tax-free, and any qualified distribution is also tax-free.

Investment accounts for education

The funds in UTMA and UGMA custodial accounts can be used for any purpose, though people often use those types of investment accounts to save for education. However, there are certain custodial investment accounts specifically designed for educational expenses: 529 college savings plans and education savings accounts (ESAs). These accounts offer special tax advantages, but they feature more restrictions on how the money can be used.

529 college savings plan

A 529 plan is a savings and investment account for college, K-12 education, and some apprenticeship programs. The most common type is the college savings plan; contributions can grow tax-free and be withdrawn tax-free for qualified educational expenses. The 529 prepaid plan, in contrast, allows adults to prepay in-state public tuition in hopes of locking in a lower rate. 529 plans are usually operated by states and can vary significantly from state to state. 

Education savings account (ESA)

An ESA, sometimes called a Coverdell education savings account, is another type of investment account for educational expenses; the beneficiary must be under 18 or be considered “special needs.” The funds can be used for college or K-12 expenses. Contributions are made post-tax, but assets can grow tax-free, and distributions for qualified educational expenses are tax-free. Withdrawals made after the beneficiary turns 30 will incur penalties and taxes.

Finding the right type of investment account for you

With so many types of investment accounts, it might seem daunting to decide which kind you want. They all have different levels of flexibility, potential tax advantages, and limitations. So it’s all about lining up your goals with the type of investment account that best supports them.

The good news is, that you don’t have to choose just one way to invest. It’s not uncommon for people to have one or more retirement accounts to take advantage of tax benefits, a brokerage account to grow money at a faster pace than inflation, and an account to save for their kids’ education. Investing can be a way to build wealth for the future, whatever your goals; with all the types of investment accounts out there, you can find the right approach for the future you want to build. 

The post Types of Investment Accounts appeared first on Stash Learn.

But the money you earn on your investments in a personal brokerage account can be subject to taxes once you sell your holdings, or close your account. That’s why it’s important to understand the tax consequences of selling your investments. Read on to find out more.

Understanding brokerage account selling

Any time you invest in the stock market, your investment has the potential to increase in value. For example, a stock you may purchase for $20 at some point could be worth $60 later on. That increase in value, or profit, once realized is called a capital gain. That profit is “realized” when you sell it. And that profit can be subject to different types of taxes, based on how long you’ve held the stock you plan to sell. 

(If you lose money, which is always a risk when investing, it’s called a capital loss. Generally speaking, you won’t owe taxes on a security that has decreased in value from the time you bought it.)

Short-term capital gains vs. Long-term capital gains

There are both short-term and long-term capital gains, and each one is taxed differently:

• Short-term capital gains are for investments held one year or less. 
• Long-term capital gains are for those held for more than one year.  

Short-term capital gains are essentially taxed at the same rate as your ordinary income for federal income tax purposes, and that rate can be nearly twice as high as the rate for long-term capital gains. The top ordinary income rate, for example, is currently 37%. The top long-term capital gain rate is 20%. 

• Good to know: There are seven ordinary income tax brackets ranging from 10% to 37%.   
• There are only three long-term capital gain brackets: 0%, 15%, and 20%.

In other words, it can pay to hold your investments for longer periods of time, as you may pay less in taxes. 

Paying taxes on dividends

A dividend is a portion of a company’s earnings, paid out to shareholders of some investments.¹ Some people reinvest their dividends automatically with a dividend reinvestment plan or DRIP, which you can set up with your Stash account if you have one. Whether you reinvest your dividends or not, you’ll likely have to pay taxes on dividend earnings. 

The rate at which the dividends are taxed depends on whether they are ordinary (nonqualified) or qualified dividends. An ordinary dividend is taxed at the same rate as your income is taxed. So if your income is taxed at 24%, dividends you earn are also taxed at that rate. 

By contrast, you may pay the lower long-term capital gain rate on a qualified dividend. Generally speaking, a qualified dividend must meet certain criteria in order to be characterized as such. It must be issued by a U.S. company or qualifying foreign company. It is also for a stock that you’ve held for a period of 60 out of 121 days, usually within a specified window of time counted from something called the ex-dividend date. (You can find out more about qualified dividends and ex-dividend dates here.)

Follow the Stash Way

Stash encourages you to follow the Stash Way, our investing philosophy which includes investing regularly, and investing for the long run.

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