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July 1, 2016

What’s a Brokerage Account?

by Josh Clavell
The end of the month rolls around, the bills are paid, your emergency cash is saved, and you have extra cash to spare. What do you do?

Elderly woman with piggy bank. Isolated over white.

Most people would transfer that cash into their savings account.

Month after month this same process occurs. Yet, as you continue to work hard for your money, your money isn’t working hard for you. In a traditional savings account, your money earns next to nothing. How can you change this? Opening a brokerage account is the answer.

Quite simply, a brokerage account is a place that facilitates the investment of your money.

A brokerage account gives you the opportunity to invest your money in investments ranging from stock in your favorite company to low cost mutual funds. Familiar companies like Schwab, TD Ameritrade and Fidelity are all examples of brokerage firms.

There are three unique characteristics of brokerage accounts.

• You can contribute to or withdraw from the account as much as you’d like. Also, unlike an IRA or Roth IRA that forces you to wait until you’re 59 ½ to take out money penalty-free, you can withdraw the money at your discretion at any age with no penalty or fee.
• The investment gains in your account don’t incur taxes unless you decide to sell. In other words, you could go years without paying taxes on appreciation in your brokerage account if you buy and hold on to your investments. And, if you do sell, the gains are taxed at the capital gains tax rate – which is usually lower than your ordinary income tax rate.
• Your heirs will completely avoid taxes on the investment gains should you die before selling your investments. This is because your heirs will get a “step up” in cost basis when you pass away, allowing them to inherit your investments without a huge tax hit.

When next month rolls around and you’re thinking about what to do with your spare money, first be sure that you have an emergency fund of 3 to 6 months of cash in your savings account. If you have that, then consider opening a brokerage account rather than contributing to your savings.

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