Brokerage account

A brokerage account is the general-purpose investment account, the one with no special rules. You deposit cash, the cash buys stocks, bonds or funds, and the account's value on any day is the cash plus what the holdings would sell for at that day's prices. A brokerage account has no contribution limit, no withdrawal age and no tax deferral, which is what separates it from a 401(k) or an IRA; the trade-off for the freedom is that the dividends it pays and any gain you lock in by selling are taxed in the year they happen. That is why it is also called a taxable brokerage account, and why it usually comes after the tax-advantaged accounts in the order people fill them.

In a sentence

• "Her brokerage account is worth $19,000 today, and $3,000 of that is gains she has not sold and so has not paid tax on."
• "The house fund is in a brokerage account, not the IRA, because we want it in five years, not at retirement."
• "A brokerage account holds investments and a savings account holds cash. Only one of them can go down."

How it works

1. Open the account and deposit cash. The cash sits in the account, earning a little interest, until it is invested.
2. Buy holdings. Stocks, bonds, mutual funds and ETFs are bought with the cash, and the broker holds them in the account.
3. Read the value. The account is worth its cash plus each holding's shares times that day's price, so the figure changes every trading day.
4. Collect income. Dividends and interest are paid into the cash balance or reinvested, and either way they are taxed as income for the year they arrive.
5. Sell to realize a gain or a loss. The difference between what a holding sold for and what it cost, its cost basis, is a capital gain or loss. A gain on a holding kept more than a year is taxed at the long-term rate, lower than the rate on ordinary income for most people; one kept a year or less is taxed as ordinary income. Losses offset gains.
6. Withdraw. Sell what you need, wait a day or two for the sale to settle, and transfer the cash to your bank. There is no age rule and no penalty, only the tax on the gain the sale realized.

Account value = cash + (shares × today's price) for every holding

The account is opened as an individual, joint or custodial account.

An example

One account, four years after it was opened, on the day its owner checks it.

The $19,000 is what the account adds to net worth today, and it will read differently tomorrow. Nothing in the last column has been taxed, because nothing has been sold. This year the fund paid about $312 in dividends, 2% of its value in the example, and that was taxed as this year's income whether it was reinvested or not. Selling the fund shares now would realize the $3,600 gain, taxed at the long-term rate because they have been held more than a year; selling the company's shares in the same year would realize the $600 loss and reduce the taxable gain to $3,000.

Why it matters

The brokerage account is where money goes that is neither for next year nor for retirement. Cash for a goal five or ten years out loses to inflation in a savings account, and money you may need before retirement is penalized inside a 401(k) or an IRA; the brokerage account sits between the two, invested but reachable. Knowing what it is prevents two opposite mistakes: treating it as a savings account, when its value can fall on the day you need it, and treating every investment as retirement money, when part of a household's savings may need to be spent sooner.

Brokerage account versus a retirement account

A retirement account, a 401(k) or an IRA, is a brokerage account wrapped in tax rules: the IRS limits what goes in each year, nothing inside is taxed while it grows, and a withdrawal before retirement age usually carries a penalty on top of the tax. A plain brokerage account has none of the three. The investments available are the same, often the same funds, so the choice between them turns on when the money will be needed and what tax it will bear. The usual order fills the tax-advantaged accounts first, and the brokerage account takes what is left, or what has to be spendable sooner.

Common questions

Is a brokerage account the same as an investment account? In everyday use, yes. Investment account is the broader term and covers retirement accounts too; brokerage account usually means the taxable, general-purpose one.

Is money in a brokerage account safe? The cash and securities are held in your name, and if the brokerage itself fails they are protected up to a limit. Nothing protects them from losing value: a fund that falls 20% is worth 20% less in a brokerage account as anywhere else.

Do I pay taxes on a brokerage account every year? On the dividends and interest it paid that year, and on the gains from anything you sold. A holding that rose but was not sold is not taxed until it is; the broker sends a yearly tax form listing all of it.

Can I take money out of a brokerage account at any time? Yes. Sell what you need, wait for the sale to settle, and transfer the cash out. There is no age requirement and no penalty, only tax on the gain the sale realized.

Should my emergency fund be in a brokerage account? No. An emergency fund is spent on the day something goes wrong, and that can be a day the market is down. It belongs in a savings account; the brokerage account is for money with years to recover.

Go deeper

• How to track net worth across brokerages, crypto and a mortgage keeps one list of every account with its value and its source, and values a brokerage account at market value on the day you check, cash included.
• How to track net worth when your investments swing every day reads the total once a month and splits each month's change into what you contributed and what the market moved.
• The Compound interest calculator shows how a starting balance and a monthly contribution grow at a given return over the years, and how much of the final amount is interest on interest rather than money you put in.

Where it shows up in Zypper

Zypper keeps a brokerage account's value in your net worth. Investment and brokerage accounts, including 401(k), IRA and Roth IRA, HSA, 529 plans, and crypto exchange accounts, connect and contribute their balances to net worth, and connected accounts update every day, so the account's value is one line in a total that is charted over time. Transfers into the account are recognized as movements between your own accounts and never read as spending. Anything you cannot connect is a manual account whose balance you set. See Supported account types and Net worth tracking for the details, or get started with Zypper to see every account in one number.