Brokerage accounts: Getting started

Money plans and priorities come in all sorts of amounts and timeframes. While saving for retirement is often top of mind, you probably also want to set aside some money for your short- and medium-term priorities. These might include saving for your children's higher education, making a sizeable charitable contribution or putting a down payment on a home.

One way to work toward these goals is by investing somewhere besides your 401(k) or individual retirement account (IRA). While it's wise to take advantage of those to the maximum you can, a brokerage account could be a good option to consider for diversifying your investments. This type of account can help you put aside additional savings while also potentially taking advantage of long-term growth opportunities.

A brokerage account allows you to buy, hold and sell various financial assets and investments, including:

• stocks
• bonds
• mutual funds
• index funds
• exchange-traded funds

The investments and assets in your brokerage account are held at a financial institution where licensed professionals buy, sell and trade at your direction. They may charge annual fees to maintain and manage your accounts, and you may also need to pay commissions on transactions. As you explore your options, be sure to review the fee structures.

Unlike traditional retirement accounts such as an employer-sponsored 401(k) or a Roth IRA, you have more flexibility in accessing your money in a brokerage account. You also won't have to worry about contribution limits or early withdrawal penalties — you can use your funds whenever you want. Keep in mind, though, that you may need to pay taxes on any gains when withdrawing the money.

Brokerage accounts are a versatile investment tool for growing your money and working toward any of your financial goals. Since these accounts don't have the same kinds of restrictions as retirement funds or 529 college savings plans, your money doesn't have to be earmarked for any particular use. Plus, since you control your investment options, you can choose stocks, mutual funds, real estate investment trusts, and more — or any combination of them — and move your money around freely.

Here's an example: Imagine you want to put aside money for a down payment on a lake house, a place where you hope your family and friends can gather for generations and create memories and traditions. You're keeping your eye on the real estate market and planning to buy in a few years. Knowing this is your goal, you may want to move some of your savings to an investment vehicle where it has the potential to grow, depending on market conditions.

In this case, a brokerage account could fit your needs, allowing you to invest money in a way that may earn a higher return than a savings account and then withdraw the money when you need it.

You might consider this strategy for a variety of your financial goals, including:

• Big purchases. A brokerage account can help you take advantage of potential long-term growth for bigger financial plans, such as making a down payment on a home, paying for a wedding or saving up for college tuition.

• Retirement. You can use a brokerage account to put aside retirement funds in addition to a 401(k) or IRA. A financial advisor can work with you to find options that fit your risk profile.

• Diversification. Brokerage accounts are one way to diversify your investment portfolio. When you have a wide array of investments, you can reduce your reduce risk exposure, especially when the market is choppy.

• Intermediate financial plans. Perhaps you're planning a home renovation or special anniversary trip down the road. You could use the money you have set aside in a brokerage account without dipping into your other savings accounts or emergency funds.

There are plenty of places to open a brokerage account, ranging from large financial institutions to online providers. A financial advisor can help you explore the options.

Most brokers allow you to open an account online with either little or no initial deposit. However, you'll need to fund the account before purchasing any investments. You can do that through your checking or savings account or even another brokerage account. Depending on your investing plan, you may deposit funds once or set up an automated transfer to buy regularly.

When you have money in your account and know what investments you want to purchase, it's time to buy. You select the number of shares or dollar amount of the investments, and the broker makes the transaction for you. Once the investments are in your account, you own them and can buy more, hold them or sell them.

When you want to withdraw funds, you can. You might transfer cash directly to your bank if you have money in your account. Or you can sell some of your investments, wait for the sale to complete and the funds to settle, and then withdraw the funds. Remember, you may have to pay taxes on any of the gains your investments made.

Bank and brokerage accounts are considered liquid—easily converted to cash and accessible. However, that doesn't mean they are the same. Your bank account is for day-to-day transactions and other short-term emergencies. Your brokerage account helps you grow your wealth over the long-term.

With your bank account, you can withdraw money immediately. Accessing the funds in your brokerage account may take a few days. In addition, unless you have cash in the account, you'll need to sell some investments first to get money. Those funds may not be available until after the transaction settles, usually a few days later.

Most bank accounts are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. Brokerage accounts don't have this type of coverage but may have Securities Investor Protection Corporation (SIPC) protection of up to $500,000 (half can be used for cash). The SIPC may help you recover the value of some of your accounts if a brokerage firm goes bankrupt, but it doesn't protect against poor investment decisions or market downturns.

Retirement accounts come with tax advantages you won't see in a non-qualified brokerage account. For example, a traditional IRA allows pre-tax contributions, and you don't have to pay taxes on qualified Roth IRA withdrawals. With a non-qualified brokerage account, you fund it with post-tax dollars and may need to pay taxes on earnings each year and on profits when you sell an investment.

While brokerage accounts lack the potential tax benefits of a retirement account (which is why they're often referred to as non-qualified accounts), you don't have to worry about contribution and withdrawal limitations on a non-qualified brokerage account. The Internal Revenue Service doesn't set maximum contribution limits—you can invest as much as you want. And you don't have to wait until age 59½ or pay a penalty to withdraw your money— it's available when you need it.

Also, there aren't any required minimum distributions, so your investments can sit for as long as you'd like without needing to sell them off or transfer your money.

You can have as many brokerage accounts as you'd like; there's no limit. Depending on your investment plans and time horizon, you may want different accounts for specific goals.

For example, you may want one brokerage account to help with short-term goals in a few years and another for long-term growth investments. However, managing many different brokerage accounts may feel overwhelming and make it hard to keep an eye on your big-picture financial strategy.

While some people create multiple accounts with the goal of diversification, you can maintain a diversified portfolio within a single account by investing in a variety of assets.

There are two types of brokerage accounts.

• A standard taxable account enables you to purchase investments with money you have in the account.
• A margin account lets you borrow money from the brokerage to purchase investments.
  

Many brokerage accounts are available to investors, from full-service to robo-advisors, where investment guidance is based on algorithms. The type of institution you want to work with will depend on your needs and your comfort level with investing.

There are a few other factors to keep in mind as you're reviewing the options, including:

• Fees. Brokerage accounts may charge account maintenance fees. Depending on the types of investments you choose, you may also have to pay account management or commissions on transactions.

• Initial investment requirements. Some brokers have no minimum to get started while some investments may require a $1,000 to $3,000 minimum to invest in specific securities.

• Investment options. Most brokerages have a wide range of investments available, but make sure they offer what you want to invest in if you have certain securities in mind.

• Customer reviews. See what other investors say about customer service and if it's easy to buy and sell online or via an app. You want to feel comfortable accessing and using the brokerage's tools.

One person you can turn to for some clarity and confidence in coming up with a plan and choosing investments is your financial advisor. They will know your financial situation, your non-negotiables and your hopes and dreams for your family. Together, you can review your current savings and find opportunities to diversify your investment strategy based on your risk profile and your needs to get you closer to reaching your goals.

Connect with a financial advisor for all your retirement planning and savings needs, including navigating different investment options.