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Are you trying to decide between a brokerage account and a savings account? Making the right financial decision can be difficult, as both accounts offer different advantages.
Learn more about the differences between brokerage accounts and savings accounts to determine which one is best for your financial future.
What is a Brokerage Account?
A brokerage account is a type of investment account that allows you to buy and sell stocks, bonds, mutual funds, and other securities. Brokerage firms offer it, which act as intermediaries between you and the financial markets.
When you open a brokerage account, you deposit money into the account, which you can then use to buy securities. You choose which securities to invest in and can usually buy and sell them as you see fit.
Brokers may charge fees for buying and selling securities and offer different types of accounts, all of which have various features and fees. Some brokerage accounts provide additional services, such as research and financial advice.
If you’re a beginner, you should always research and choose a reputable brokerage firm that meets your needs and aligns with your long-term goals.
Benefits of Brokerage Accounts
Considering a brokerage account? Check out these advantages:
- No contribution limits: Unlike some retirement accounts, brokerage accounts typically don’t have a limit on how much money you can contribute, giving you more flexibility in how much you invest.
- Withdraw money anytime: You can withdraw money from a brokerage account at any time without penalty or restrictions, making it a more flexible investment option.
- Borrow money: Some brokerage accounts allow you to borrow money against your investments, providing a source of liquidity when you need it.
- FDIC insurance: Some brokerage firms offer members FDIC insurance on cash balances held in brokerage accounts, which provides a level of protection for your funds.
- Many investment options: Brokerage accounts offer a wide range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs), giving you the ability to diversify your portfolio and potentially earn a higher return on your investment.
Drawbacks of Brokerage Accounts
As with all accounts, brokerage accounts have several disadvantages.
- No tax advantages: Unlike some retirement accounts, brokerage accounts do not offer any tax advantages, meaning you will have to pay taxes on any earnings or dividends you receive.
- Capital gains taxes: When you sell an investment in a brokerage account for a profit, you will have to pay capital gains taxes on the gains, which can eat into your overall returns.
- Limited financial advice: While some brokerage firms may offer financial advice, it is generally limited to investment recommendations and may not consider your overall financial situation or goals. If you need more information, you should contact your financial advisor first.
- Commissions and fees: Brokerage accounts often come with commissions and fees for buying and selling securities, as well as other account maintenance fees, which can add up and reduce your overall returns.
What are Savings Accounts?
Most people are familiar with a savings account and even have one at their banking institution. A savings account is a type of bank account that is designed to help you save money over time.
When you open a savings account, you deposit money into the account, which earns interest or annual percentage yield (APY) over time.
You can typically withdraw money from the account whenever you like, although some accounts may have restrictions or penalties for early withdrawals.
Banks and credit unions offer savings accounts, and they are often used to save money for emergencies, large purchases or other financial goals.
Savings accounts are considered a low-risk investment option, as they are FDIC-insured and typically offer a lower interest rate than other investment options.
Benefits of Savings Accounts
The pros of opening a savings account include:
- Ability to earn interest: Savings accounts mean you can earn interest on your deposited funds, which can help your savings grow over time.
- FDIC-insured: Savings accounts are typically insured by the FDIC, meaning that your deposited funds are protected up to a certain amount in the event of bank failure.
- Accessibility: Savings accounts are usually very accessible, with most banks offering online banking and mobile apps to make deposits and withdrawals easy.
- Automatic savings: Some banks offer such features as automatic savings transfers, where you can set up recurring transfers from your checking account to your savings account, helping you save money without even thinking about it.
- Easy to open: Online savings accounts are generally easy to open, requiring only a small amount of personal information and a minimum amount of money.
Drawbacks of Savings Accounts
Although savings accounts are common, there are a few potential disadvantages.
- Low return: While you can earn interest with savings accounts, the interest rates are typically much lower than other investment options, such as stocks or bonds.
- Banks may charge fees: Some banks may charge fees for maintaining a savings account, such as monthly maintenance, ATM or minimum balance fees, which can eat into your overall returns.
- Minimum balance requirements: Some savings accounts may require account minimums to avoid fees or earn interest, which may be difficult for some people to maintain.
- Federal withdrawal limits: Federal regulations may limit the number of withdrawals or transfers from savings accounts, so it’s important to find out all the details before you open a savings account.
Brokerage Account vs Savings Account: How Do They Compare?
|Brokerage Account||Savings Account|
|No contribution limits||Ability to earn interest|
|Withdraw money anytime||Accessibility|
|Lots of investment options||Automatic savings|
|Capital gains taxes||Easy to open|
Which is Better: Brokerage Account or Savings Account?
Deciding between a brokerage account and a savings account ultimately depends on your financial goals and investment experience.
In general, a good investment strategy should include a mix of both brokerage and savings accounts, depending on an individual’s financial goals and risk tolerance. A financial advisor can help determine the best investment strategy for your unique situation.
- An investor should choose a brokerage account if they are comfortable with the volatility of the stock market and taking on more risk in exchange for the potential of higher returns over the long term.
- Brokerage accounts offer a wide range of investment options, including stocks, bonds, mutual funds and ETFs, which can be tailored to an investor’s specific goals and risk tolerance.
- Brokerage accounts also offer the ability to borrow money and trade on margin, which can provide leverage for experienced investors looking to maximize their returns.
- An investor should choose a savings account if they have short-term financial goals, such as saving for a down payment on a house or building an emergency fund.
- Savings accounts offer a low-risk way to save money while earning interest on deposited funds. While the interest rates may be lower than other investment options, savings accounts are a safe and accessible option for those looking to grow their personal finances.
- Savings accounts are also FDIC-insured, which means that deposited funds are protected up to a certain amount in the event of bank failure, providing an additional level of security for investors.
Check out these commonly asked questions about brokerage and savings accounts.
Is money safer in a bank or brokerage account?
Money in a bank account is generally considered safer than in a brokerage account due to FDIC insurance protection, but the tradeoff is lower potential returns.
How much should I keep in a savings vs. a brokerage account?
The amount to keep in savings account compared with a brokerage account depends on your financial goals, risk tolerance and time horizon for investing.
It’s best to have at least three to six months’ worth of living expenses in a savings account for emergencies and to invest in a brokerage account for long-term financial goals.
Do I have to pay capital gains taxes with a savings account?
No, capital gains taxes are typically not paid on savings accounts, as they earn interest income rather than capital gains.
However, you may owe taxes on the interest earned, depending on your income level and other factors.