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What is a brokerage account?

Mar 21, 2022
Empower Insights

How they differ from other types of accounts and why you should consider opening one

In general, a brokerage account allows you to buy and sell investments, including individual stocks, bonds and mutual funds. Brokerage accounts are more commonly associated with non-retirement accounts. (But there are types specifically designed to support saving for retirement, such as the Empower Brokerage IRA).

For this article, we’ll be sharing information about standard, or taxable, brokerage accounts, which are not intended for the sole purpose of saving for retirement.

How do brokerage accounts differ from other account types?

Similar to other types of investment accounts, taxable brokerage accounts help you invest money for short and long-term financial goals, while providing the potential for your money to grow. But they're also different from other accounts in some important respects:

Brokerage accounts vs. IRAs

Individual retirement accounts (IRAs) are specifically designed to help you save for retirement so they have strict annual contribution limits, and you may face penalties if you make withdrawals before designated times. The money in your taxable brokerage account is not limited to retirement, and there are no limits to how much you can deposit,  transfer, or withdraw from the account.

Brokerage accounts and IRAs are also taxed differently. Contributions to traditional IRAs are tax-deductible until you withdraw the money for retirement, as long as you meet certain requirements. By contrast, there is no tax break for any of the deposits you make into taxable brokerage accounts or Roth IRAs.

Moreover, the assets in a traditional IRA are not taxed until you withdraw them in retirement. With a taxable brokerage account, any potential earnings are subject to annual income and/or capital gains taxes. However, qualified withdrawals from Roth IRAs are tax-free in retirement.

Brokerage accounts vs. 401(k)s

Taxable brokerage accounts can have more flexibility when it comes to investment options and aren’t governed by IRS contribution limits like 401(k)s and IRAs are. 401(k) accounts are employer-sponsored plans that allow employees to save for retirement using pretax money taken directly from their paychecks. They offer the same tax advantages as IRAs. With a traditional 401(k), you contribute pre-tax dollars and your withdrawals in retirement are taxed as ordinary income. Meanwhile, you contribute after-tax money to a Roth 401(k), and qualified withdrawals in retirement are tax-free.

Brokerage accounts vs. mutual funds

Mutual funds are managed investments that pool together money from different investors into one portfolio. Mutual fund managers then purchase individual securities based upon the fund’s investment objective. For instance, one mutual fund might hold shares of over a hundred individual stocks.

Think of it like this: Brokerage accounts hold your investments, and mutual funds are investments in and of themselves.

Brokerage accounts vs. cash management accounts (CMAs)

CMAs are alternatives to savings and/or checking accounts that are typically offered through non-bank financial institutions such as investment firms. An umbrella account allows you to hold and link your checking, savings accounts (CMAs) and investments together. Brokerage accounts, on the other hand, are exclusively for investments.

Brokerage Account. Image of hands writing and holding mobile phone

How do you open a brokerage account?

You can open a taxable brokerage account through a full-service or online brokerage firm. To start investing, you’ll need to deposit money into the account by transferring funds from an existing taxable account such as a checking or savings bank account or another taxable brokerage account.

Although you need a brokerage company to open the account, you are in full control of how much you transfer and withdraw. The brokerage firm simply maintains the account and serves as an intermediary between you and your investments. Depending on your investment preference, you can authorize your broker to buy and sell investments on your behalf.

Can you have multiple brokerage accounts?

Yes. There is no limit to the number of taxable brokerage accounts you can open.

What are the benefits of a brokerage account?

Taxable brokerage accounts generally give you the most flexibility out of all investment accounts. There are no funding limits or income restrictions and no rules stipulating when or how much you can withdraw from the account. Taxable brokerage accounts typically move your uninvested cash into what’s called a sweep account or an interest-earning account.

The drawback, of course, is that you won’t receive any tax breaks on the assets in a taxable brokerage account. And just like all investments, there is risk involved, profits aren’t guaranteed, and loss of principal is possible.

However, if you’ve maxed out your retirement contributions, or are working toward non-retirement financial goals, a taxable brokerage account may help provide the flexibility you need.

Learn more about an Empower Investment Account

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The Empower Investment Account (EIA) is intended for knowledgeable investors who acknowledge and understand the risks associated with the investments available through a brokerage account.

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What is a beneficiary?

Ensure your beneficiary designations continue to reflect your wishes by reviewing them at least annually.

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Securities, when presented, are offered and/or distributed by GWFS Equities, Inc., Member FINRA/SIPC. GWFS is an affiliate of Empower Retirement, LLC; Great-West Funds, Inc.; and registered investment adviser, Advised Assets Group, LLC. This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice.

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