A brokerage account lets you buy and sell stocks, bonds, mutual funds, and other investments through a broker
A brokerage account is an investment account you open with a brokerage firm — a company licensed to buy and sell securities on your behalf. You deposit money into the account, and the broker executes trades when you decide to purchase or sell investments. Unlike a retirement account (like an IRA or 401(k)), a brokerage account has no contribution limits, no age restrictions on withdrawals, and no tax-deferred growth. You pay taxes on gains and dividends each year.
The broker holds your money and securities in your name and keeps a record of every transaction. When you want to buy 100 shares of a stock, you place an order through the broker's website or app, and the broker finds a seller and completes the trade. When you sell, the broker finds a buyer and deposits the proceeds into your account. The broker charges a commission or fee for this service, though many brokers now offer commission-free stock and ETF trades.
Key Takeaways
- A brokerage account is a taxable investment account with no contribution limits, no withdrawal age restrictions, and no required minimum distributions.
- You can buy and sell stocks, bonds, mutual funds, ETFs, options, and other securities through a brokerage account whenever you choose.
- You pay federal and state income tax on capital gains and dividends each year, even if you do not withdraw the money.
- Brokerage accounts are separate from retirement accounts and do not offer the same tax advantages, but they offer more flexibility in how and when you can access your money.
What you can buy and sell in a brokerage account
A standard brokerage account gives you access to a wide range of securities. You can buy individual stocks in publicly traded companies, bonds issued by governments or corporations, mutual funds (which pool money from many investors to buy a diversified portfolio), and exchange-traded funds or ETFs (which trade like stocks but hold a basket of securities). Some brokers also offer options trading, which lets you buy the right to purchase or sell a stock at a set price by a certain date.
The specific investments available depend on your broker. Most major brokers like Fidelity, Charles Schwab, E*TRADE, and Vanguard offer stocks, bonds, mutual funds, and ETFs. Some brokers restrict options trading to account holders who meet certain experience or net-worth requirements. A few brokers also offer access to cryptocurrencies or fractional shares (allowing you to buy a portion of a stock rather than a whole share). Check your broker's website to see what asset classes they support.
How taxes work on brokerage account earnings
When you make money in a brokerage account, you owe taxes on it. If you sell an investment for more than you paid, you have a capital gain. If you hold the investment for more than one year before selling, it is taxed as a long-term capital gain, which usually has a lower tax rate than ordinary income. If you sell within one year, it is a short-term capital gain and taxed at your regular income tax rate.
You also owe taxes on dividends — payments companies make to shareholders — even if you reinvest them back into the account. may have access to dividends (from U.S. stocks held for at least 60 days around the dividend date) are taxed at the long-term capital gains rate. Non-may have access to dividends are taxed as ordinary income. At the end of each year, your broker sends you a 1099 form showing your gains, losses, and dividends, and you report these on your tax return.
You can reduce your tax bill by tax-loss harvesting — selling investments at a loss to offset gains elsewhere in your portfolio. You can deduct up to $3,000 in net capital losses against ordinary income each year, and carry forward any remaining losses to future years. This strategy works only in taxable accounts; retirement accounts do not allow it because gains and losses are not taxed annually.
When to use a brokerage account instead of a retirement account
A brokerage account makes sense when you have already maxed out your retirement account contributions or when you need access to your money before retirement age. In 2024, you can contribute up to $7,000 per year to a traditional or Roth IRA (or $8,000 if you are 50 or older), and your employer's 401(k) has a limit of $23,500 per year. If you have more money to invest, a brokerage account is the next step.
A brokerage account is also the right choice if you want to withdraw money without penalty before age 59½. Retirement accounts impose a 10% early withdrawal penalty (with some exceptions) if you take money out before that age. A brokerage account has no age restrictions — you can withdraw your money anytime, though you will owe taxes on any gains you have realized.
Some investors also use a brokerage account for short-term trading or to hold investments they do not want in a retirement account. For example, if you want to trade options or individual stocks frequently, a brokerage account gives you that flexibility. A brokerage account also works well if you are saving for a specific near-term goal — a home down payment, a car, or a major purchase — and you want to invest the money rather than keep it in a savings account.
How to open a brokerage account
Opening a brokerage account takes 10 to 15 minutes online. You choose a broker, go to their website, and click the button to open an account. You will need to provide your name, address, Social Security number, employment information, and details about your investment experience and goals. The broker uses this information to verify your identity and comply with federal regulations.
After you submit your application, the broker reviews it and usually approves it within one business day. Some brokers approve accounts instantly. Once approved, you can link a bank account and transfer money into your brokerage account. Most brokers offer multiple ways to fund an account: ACH transfer (which takes one to three business days), wire transfer (same day or next day, but may have a fee), or check deposit (which takes several business days).
After your money arrives in the account, you can place your first trade. You can buy fractional shares of ETFs or stocks at most brokers, so you do not need a large amount of money to get your free guide. Some brokers have no minimum deposit requirement, while others ask for $500 or $1,000 to open an account. Check the broker's website for their current minimums.
Fees and costs to watch for
Most brokers no longer charge commissions on stock and ETF trades, but they may charge fees in other situations. If you trade mutual funds, you may pay a transaction fee of $5 to $50 per trade, depending on the fund and broker. Some brokers charge an annual account maintenance fee if your balance falls below a certain amount, though this is becoming less common.
You may also pay fees for certain services: wire transfers out of your account (typically $15 to $30), closing an account, or using margin (borrowing money from the broker to buy securities). Some brokers charge inactivity fees if you do not trade for a certain period, though most major brokers have eliminated this. Always check your broker's fee schedule before opening an account.
Beyond broker fees, you will pay fees inside mutual funds and ETFs themselves. These are called expense ratios and are expressed as a percentage of your investment. A fund with a 0.05% expense ratio costs $5 per year for every $10,000 you invest. A fund with a 1% expense ratio costs $100 per year on the same amount. Over decades, even small differences in expense ratios add up significantly, so compare funds before you buy.
How a brokerage account differs from a retirement account
| Feature | Brokerage Account | Retirement Account (IRA or 401k) |
|---|---|---|
| Annual contribution limit | None | $7,000 (IRA) or $23,500 (401k) in 2024 |
| Tax on gains and dividends | Taxed each year | Tax-deferred or tax-free (depending on account type) |
| Withdrawal age | Anytime, no penalty | Age 59½ without penalty; earlier withdrawals may incur 10% penalty |
| Required minimum distributions | None | Yes, starting at age 73 (for traditional IRAs and 401ks) |
| Best use | Long-term investing beyond retirement savings limits; short-term goals | Retirement savings with tax advantages |
Frequently Asked Questions
Can I lose more money than I put into a brokerage account?
In a standard brokerage account, you can lose only what you invested. If you buy $5,000 worth of stock and it drops to zero, you lose $5,000. However, if you use margin (borrowing money from your broker to buy securities), you can lose more than your initial deposit because you owe the borrowed amount back regardless of what happens to the stock.
Do I have to report my brokerage account to the IRS?
You do not file a separate report for the account itself, but you must report the income from it on your tax return. Your broker sends you a 1099 form each January showing your capital gains, losses, and dividends. You report these on Schedule D and Schedule B of your Form 1040. If you have significant foreign investments, you may need to file additional forms.
Can I transfer money from a brokerage account to a retirement account?
You cannot directly transfer money from a brokerage account into an IRA or 401(k) because contribution limits apply to new money only. However, you can withdraw money from your brokerage account and deposit it into a retirement account, as long as you stay within that year's contribution limit. The money you withdraw is subject to capital gains tax in the year you withdraw it.
What happens to my brokerage account if the broker goes out of business?
Your securities and cash are protected by the Securities Investor Protection Corporation (SIPC) up to $500,000 per account (with a $250,000 limit on cash). SIPC coverage applies if the broker fails, not if your investments lose value. If your broker is acquired by another firm, your account typically transfers to the new broker without interruption.
Can I use a brokerage account for a child?
Yes, through a custodial account. A parent or guardian opens the account in the child's name and manages it until the child reaches the age of majority (18 or 21, depending on your state). Earnings in a custodial account are taxed to the child, which may result in lower taxes if the child has little other income. The child gains full control of the account at the age of majority.