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Investing in the stock market can be a great way to build wealth and create financial security. But before you start investing, it’s important to understand the differences between individual and joint brokerage accounts.
Both types of accounts have their own benefits and drawbacks depending on your investment goals, risk tolerance level and other factors, such as taxes or estate planning needs.
Therefore, it’s important to weigh all your options carefully before deciding which one is right for you.
What is an Individual Account?
An individual account is an investment account that is owned and managed by a single person. These accounts can be used for a variety of investment purposes, including buying and selling stocks, bonds, mutual funds, exchange-traded funds, and other securities.
One popular type of individual account is a margin account, which allows investors to borrow money from their broker to invest in securities. Many major brokers, including Fidelity and E*TRADE, offer margin accounts.
With a margin account, investors could earn higher returns on their investments, but they also take on additional risk, as they must repay any borrowed funds plus interest, even if their investments decline in value.
Advantages of Individual Accounts
Here are some of the key advantages of opening an individual account:
- Flexibility: With an individual account, you have complete control over your investment decisions and can customize your investment strategy to meet your specific needs and goals.
- No contribution limits: Unlike some Roth IRAs, there are no limits regarding how much you can contribute to an individual account each year. This makes it a great option for investors who want to save more than the maximum contribution limit for their retirement account.
- Easy to open: Opening an individual account is typically a quick and simple process and can often be done entirely online, making it ideal for beginners.
- Withdraw money anytime: Unlike retirement accounts, which often have restrictions on when and how you can withdraw your funds, an individual account allows you to withdraw your money at any time.
- Federal Deposit Insurance Corporation (FDIC)-insured: Many banks and credit unions offer individual accounts that are insured by the FDIC, which means your money is protected by up to $250,000 per account.
- Earn interest on money you lend: With a margin account, you can lend money to other investors who want to borrow funds to invest in securities. This can be a great way to earn extra income on your idle cash.
Drawbacks of Individual Accounts
You should consider these potential downsides before opening an individual account:
- Limited profit opportunities: Unlike other investment options, individual accounts may have limited profit opportunities, particularly if you’re not using margin or other leveraged strategies.
- Settlement periods: When you buy or sell securities in an individual account, there is typically a settlement period during which the transaction is finalized. This can create delays in accessing your funds or executing trades, particularly if you need to liquidate your investments quickly.
- No short selling securities: With an individual account, you may not be able to engage in the short selling of securities, which can limit your ability to profit from declining markets.
- Limited ability to futures trading: Some individual accounts may not allow you to trade futures contracts, which can limit your ability to diversify your portfolio and take advantage of certain investment opportunities.
What is a Joint Brokerage Account?
A joint brokerage account is an investment account that is owned and managed by two or more people. These accounts can be used for a variety of investment purposes, including buying and selling stocks, bonds, mutual funds, and other securities.
Joint brokerage accounts offer several advantages over individual accounts. For example, they allow multiple account holders to pool their resources, share an account and invest together, which can increase their buying power and potentially lead to higher returns.
Additionally, joint accounts can be a good option for married couples or business partners who want to share responsibility for their investments and make joint decisions about their investment strategy.
One popular type of joint brokerage account is a cash account, which allows investors to buy and sell securities using cash rather than borrowed funds.
Cash accounts are offered by many major brokers, including Vanguard and Charles Schwab. With a cash account, investors can potentially earn steady returns on their investments without taking on the additional risk of borrowed funds.
Advantages of Joint Brokerage Accounts
Here are some benefits that are associated with joint brokerage accounts:
- Combined resources: By pooling your resources with other account holders, you can potentially increase your buying power and access more investment opportunities than you would have on your own.
- Couples combining finances: For couples who are combining their finances, a joint brokerage account can be a good option for managing their investments together and sharing responsibility for their financial future.
- Simplify estate planning: Joint brokerage accounts can also simplify estate planning, as assets held in the account will typically pass to the surviving account holder(s) without having to go through probate.
- Single investment manager: With a joint account, you can work with a single investment manager or financial advisor to manage your investments, which can streamline the investment process and help align your investment strategy with your overall financial goals.
- Mobile apps: Many brokers offer mobile apps that allow you to easily manage your joint account and track your investments from anywhere, making it more convenient to stay on top of your finances.
Drawbacks of Joint Brokerage Accounts
While joint brokerage accounts can offer many advantages, there are also some potential drawbacks to consider:
- Both parties have 100% access: With a joint account, both parties have full access to the account and can make investment decisions and withdrawals without the other person’s consent. This can create potential conflicts if the account holders have different investment goals or risk tolerances.
- Transparency and trust: Joint accounts require a high level of trust and transparency between account holders, which can be challenging for some people.
- No designation of beneficiaries: Unlike individual accounts, joint accounts don’t typically allow you to designate specific beneficiaries for your assets, which can complicate estate planning.
- Greater risk from creditors: If one account holder has creditors or legal judgments against them, the assets in the joint account may be vulnerable to seizure.
- Gift tax liabilities: When one account holder contributes more than 50% of the assets to the account, it can be considered a gift for tax purposes, which can create tax liabilities for both account holders.
Joint vs. Individual Account: How do they compare?
|Joint Accounts||Individual Accounts|
|Simplified estate planning||No contribution limits|
|Gift tax liabilities||Withdrawal money anytime|
|No designation of beneficiaries||Limited profit opportunities|
Which is Better: Individual Account or Joint Account?
When it comes to choosing between an individual account and a joint account, there is no one-size-fits-all answer. The best option for you will depend on your individual circumstances, investment goals and risk tolerance.
- You want complete control over your investments and investment decisions.
- You have a higher risk tolerance and are comfortable making your own investment decisions.
- You are not interested in sharing investment responsibility with anyone else.
- You want to share investment responsibility with another person or group.
- You want to simplify estate planning.
- You have a lower risk tolerance and want to work with a partner to manage your investments.
Check out some of these commonly asked questions about individual and joint brokerage accounts below.
Should couples have separate brokerage accounts?
It depends on the couple’s individual preferences and circumstances. Separate accounts can offer more control and flexibility, while joint accounts can simplify investment management and estate planning.
How does a joint brokerage account affect taxes?
Joint brokerage accounts are taxed based on each account holder’s proportion of ownership. Income, gains and losses are typically divided based on the percentage of the account owned by each person.
Can you ever withdraw money from your individual account?
Yes, you can withdraw money from your individual account at any time, subject to any penalties or restrictions imposed by your broker or financial institution.