For investors approaching retirement, a brokerage account is a flexible investment account that can offer more investment options and easier access to funds than tax-advantaged accounts. In this post, we’ll explore how to choose the right brokerage account, the benefits it can offer in retirement planning, and the potential downsides to keep in mind when managing your wealth as retirement nears.

What Is A Brokerage Account?

A brokerage account is a type of financial account that allows you to buy, sell, and hold a wide variety of investments, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). It’s a core tool for building wealth, and it can play a significant role in retirement planning. A brokerage account offers several advantages and considerations when planning for long-term financial goals.

Key Features of a Brokerage Account:

1. Investment Flexibility: Unlike retirement-specific accounts like IRAs or 401(k)s, a brokerage account allows you to invest in almost any type of asset, giving you access to a wide range of investment vehicles.
2. Taxation: The income you generate from a brokerage account is taxed differently than that in tax-advantaged accounts. While retirement accounts like IRAs and 401(k)s offer tax deferrals or tax-free growth, brokerage accounts are subject to capital gains tax on profits when assets are sold, and dividends are taxed as ordinary income.
3. No Contribution Limits: Unlike retirement accounts, there are no annual contribution limits to brokerage accounts. This provides flexibility to save and invest as much as you want, making it an excellent complement to other retirement savings vehicles.
4. Liquidity: One of the main advantages of a brokerage account is liquidity, meaning that you can access your funds at any time without penalties (unlike 401(k)s or IRAs, where withdrawals before age 59½ may trigger penalties).
5. No Required Minimum Distributions (RMDs): Unlike retirement accounts like traditional IRAs or 401(k)s, there are no RMDs (Required Minimum Distributions) in a brokerage account. This can be an advantage if you want more control over your withdrawals in retirement.
6. Investment Strategy Flexibility: A brokerage account allows you to tailor your investment strategy to your specific retirement needs. You can balance risk and return based on your age, time horizon, and retirement goals. Many retirees use brokerage accounts for more flexible income strategies, especially when combined with other retirement assets.

How To Pick A Brokerage Account

When choosing a brokerage account, you’ll want to focus on a few key factors to ensure your account suits your financial goals and retirement needs. Here’s a breakdown of the most important things to consider:

1. Investment Needs and Risk. As retirement nears, lower-risk options like bonds, dividend stocks, or index funds become more important. Target-date funds can adjust risk automatically. For income, seek dividend-paying stocks or bond funds.
2. Access to Funds. Brokerage accounts are liquid—no penalties for withdrawals. Choose one with fast, easy transfers to your bank and no withdrawal hassles.
3. Costs and Fees. Opt for a brokerage with no commissions and low or no maintenance fees. Also, pick low-expense funds to minimize investment costs.
4. Tax Efficiency. Look for tax-efficient funds (like ETFs) and ensure the brokerage provides clear tax reporting for capital gains and income tracking.
5. Investment Choices and Tools. Choose a platform with a wide range of investment options—stocks, bonds, ETFs, REITs—and helpful tools like research, real-time data, and portfolio tracking. This way you can diversify your portfolio.
6. Customer Support. Strong, accessible support becomes more important in retirement. Choose a brokerage that offers reliable guidance when you need it.

What Is The Downside To A Brokerage Account?

While a brokerage account offers many benefits, such as flexibility, liquidity, and a wide range of investment options, it does have some downsides. Here are the main disadvantages to be aware of:

1. Capital Gains and Dividend Taxes. Profits from selling investments are taxed. Short-term gains (held under a year) are taxed as regular income, while long-term gains get lower rates. Dividends are also taxed, often higher rate than in retirement accounts.
2. No Tax Advantages. Brokerage accounts don’t offer tax deductions, deferrals, or tax-free growth. You’ll owe taxes on gains each year.
3. Temptation to Overspend. With no withdrawal restrictions, it’s easy to dip into your funds too often, risking long-term savings.
4. Market Risk. Your investments can lose value. This volatility can be risky if you’re depending on the account for retirement income.
5. Limited Estate Benefits. Unlike retirement accounts, brokerage accounts don’t offer tax perks for heirs, possibly increasing their tax burden.
6. No Required Withdrawals. Not having to worry about RMDs gives flexibility, but you’ll need to manage withdrawals wisely to avoid higher taxes later.
7. Overtrading Risk. Easy access can lead to frequent trades or emotional decisions, resulting in extra costs or poor timing.

Is Your Money Safer In A Bank Or A Brokerage Account?

Money in a bank account is generally safer because it’s FDIC-insured up to $250,000 per depositor, meaning the government guarantees it. In a brokerage account, investments can lose value due to market risks, though the funds themselves are safe. SIPC insurance protects up to $500,000 in case the brokerage firm fails, but it doesn’t cover losses from investments. In short, banks are safer for holding cash, while brokerage accounts carry more risk but offer greater potential for growth through investments.

Have more questions about brokerage accounts and how to pick them? Contact Zynergy Retirement Planning today.