Written By: John Paul Curtin

A brokerage account is a taxable (non-retirement) account that is held at a licensed securities firm or brokerage. Typically these investment accounts are set up to link to a checking or savings account to allow for electronic transfers of money between accounts. In terms of liquidity, a brokerage account is similar to a savings account in that funds can be deposited or withdrawn at any time. However, a brokerage account allows you to invest your money into a wide variety of security types, including: stocks, bonds, exchange-traded funds (ETFs), mutual funds and more. While savings accounts allow you to earn interest on your account balance with virtually no risk, brokerage accounts allow investors to bear more risk for the opportunity to earn higher returns.

Types of Brokerage Accounts

A Cash Account is a brokerage account in which you are required to pay for all securities in full at the time of purchase.

With a Margin Account, however, you can use the value of your existing holdings as collateral to purchase additional securities. If you choose to buy shares of a stock on margin, the broker will lend you funds at the time of purchase and will charge interest on the borrowed funds until the balance is zero. This adds another level of risk to buying a security. If the cash you are borrowing is backed by your current holdings, what happens if the value of those assets decreases? In this case the broker can issue a margin call whereby the account holder will have to deposit cash to cover the margin, or risk liquidating positions within the account (sometimes involuntarily).

Tax Consequences

Unlike tax-deferred accounts, or retirement accounts, money can be withdrawn from a brokerage account at any time without penalty. However, taxable accounts are subject to a capital gains tax on profits that result from selling a security at a gain. It is important to note that the taxable event occurs only when the asset is sold.  There are no tax consequences for simply depositing or withdrawing funds from a brokerage account, or for selling positions at a loss.

Other potential taxable events can occur if any holdings pay dividends or distribute income from capital gains.

Choosing a Broker

When choosing a broker, it is important to consider one’s personal situation and ask the following questions:

  • Account Features/Services: What resources are available to guide your investment decisions and overall experience? This can include research materials, advisory services, and customer service.
  • Fees: What fees are associated with opening and maintaining an account? This includes brokerage fees, trade commissions and potential margin costs. Certain brokerage fees can be hidden, so it is important to read the fine print.
  • Available Investment Options: What asset types and/or funds will you be able to choose from?

Prior to opening an account, you should run a background check on the brokerage firm with whom you’ve chosen to invest. You can do this using BrokerCheck, a service provided by the Financial Industry Regulatory Authority (FINRA).

If you would like advice on your brokerage accounts or on your overall portfolio, be sure to contact us at Agili. We offer a wide array of investment management services and we’d love to help!