What Is a Brokerage Account? Definition, How to Open One

A brokerage account is an investment account used to purchase investments such as stocks, bonds, mutual funds and ETFs. They have no contribution limits or early withdrawal penalties, but in exchange for this flexibility, you won’t get the tax benefits found in retirement accounts.

You can open a brokerage account quickly online. Many brokerage firms allow you to open an account with no upfront deposit. However, you will need to fund the account before you buy investments. You can move money from your checking or savings account or another brokerage account.

You own the money and investments in your brokerage account and can sell investments anytime. The broker holds your account and acts as a middleman between you and the investments you want to buy.

You can open more than one brokerage account and there’s no limit on the amount of money you can put into a taxable brokerage account each year. There should be no fee to open a brokerage account.

Online brokers and robo-advisors both offer retirement accounts and taxable brokerage accounts.

“You want to be careful with which company you open your brokerage accounts with,” says Wendy Moyers, a certified financial planner at Chevy Chase Trust in Bethesda, Maryland. “And you should be walking in with an awareness of what you’re going to be investing in. You want to do a little research.”

If you want to purchase and manage your investments, an online brokerage account is for you. An account with an online brokerage company enables you to buy and sell investments through the broker’s website. Discount brokers offer a range of investments, including stocks, mutual funds and bonds.

A managed brokerage account comes with investment management from a human investment advisor or a robo-advisor. A robo-advisor provides a low-cost alternative to hiring a human investment manager. These companies use computer programs to choose and manage your investments based on your goals and timeline. Robo-advisors may be a good fit if you want to be hands-off about your investments.

Setting up a brokerage account is simple. You can typically complete an application online in under 15 minutes. You then add money to a brokerage account, similar to depositing funds into a bank account. In most states, you must be 18 to open your account. But parents can set up a brokerage account for their kids.

Once you’ve opened the account, you need to deposit or transfer funds before you can invest. That sounds complicated, but these days, it’s pretty simple to link your bank account with a brokerage account online.

Some brokers make you verify a transaction. If that’s the case, you’ll have to wait until the broker deposits a small sum in your bank account — typically a few cents. Then, you’ll confirm the transaction by telling the brokerage the amount deposited. The broker can walk you through the process if you have any questions. After the transfer is complete and your brokerage account is funded, you can start investing.

Your brokerage account may ask you if you’d like to enable margin trading. A margin account allows you to borrow money from the broker to make trades. You’ll pay interest for margin trading, though, and it’s risky. Generally, it’s a good idea to stick with a cash account at first.

The act of opening a brokerage account doesn’t mean you’ll be on the hook for additional taxes. However, investment income within a brokerage account — the profits from selling your investments — is subject to capital gains taxes. This is why brokerage accounts are also called “taxable accounts.” Retirement accounts (such as IRAs) follow different tax and withdrawal rules that can benefit retirement savings and investing.

But that doesn’t mean brokerage accounts are “non-tax advantaged,” according to Delyanne Barros, founder of Delyanne The Money Coach.

“The benefit of the brokerage account is leveraging the long-term capital gains tax,” she said in an email interview. “In order to do that you must be a long- term investor. That means you have to hold your investments for over a year. Not only will this help you capture the most favorable tax bracket, but it will likely result in better returns.” Depending on your taxable income and filing status, the long-term capital gains tax rate is 0%, 15% or 20%^[0]

The key to reaping a brokerage account’s advantages, Barros said, is to stay invested, ignore the day-to-day stock market noise, “and go live your life.” Here are five brokerage account tax tips to keep in mind.

1. If you buy stock through a brokerage account, you’ll probably have to pay capital gains tax if you sell it for a profit later. 

2. If you sell a stock a year or less after buying it, you may have to pay short-term capital gains tax. This is usually your ordinary income tax rate and is often higher than the long-term capital gains rate.

3. If you sell an investment for a loss, you can use that loss to offset some of your gains and reduce your capital gains tax burden.

4. If the stock or fund you buy through a brokerage account pays dividends, you’ll have to pay taxes even if you choose to reinvest them. If this is the case, your brokerage will send the relatively uncomplicated DIV-1099 tax form to include in your tax return.

5. If you invest through a retirement account, you typically won’t have to worry about this.

In a standard brokerage account you’re contributing post-tax money. In most cases, your investment earnings will be taxed. On the plus side, there are very few rules for brokerage accounts. You can pull your money out anytime, for any reason, and invest as much as you’d like.

In a Roth IRA, you also contribute post-tax money. Once you reach 59½ and have held your account for at least five years, you can withdraw your money, including earnings, without paying additional taxes^[0]

“Ideally, you should have both, but prioritizing the Roth IRA is best so you can grow your money tax-free,” said Barros.

Moyers also says the ideal situation is to have both, but it depends on your goals. An IRA is a good way to save money for retirement. But, she says, you are tying your money up for a long time.

“If you want to save money to buy a house, a brokerage account would be more appropriate,” Moyers says. If you want to invest for retirement, consider opening a retirement account rather than a taxable brokerage account.

You might already be investing for retirement through your work. Many companies offer an employer-sponsored plan such as a a 401(k) and match your contributions. You can still open an IRA, but we recommend contributing at least enough to your 401(k) to earn that match first.

The table below provides a few details on the differences between a brokerage account with and retirement account.