The Swiss Army Knife of Investment Accounts - Brokerage Accounts

Brokerage Accounts - Unparalleled Flexibility

When most financial “gurus” talk about investing, the spotlight often falls on IRAs, 401(k)s, and other tax-advantaged accounts. Brokerage accounts, by contrast, are treated like the underdog: no flashy tax breaks, fewer marketing hooks. But that doesn’t make them unimportant. However, in financial planning, flexibility can often trump optimization as the better solution for our financial lives. In fact, their flexibility makes them indispensable in a well-rounded financial plan.

Below, we’ll explore why brokerage accounts are powerful financial tools that deserve your attention.

What Is a Brokerage Account?

A brokerage account is an investment account that lets you buy and sell securities like stocks, bonds, ETFs, mutual funds, etc. through a broker. Some common online broker include Fidelity, Vanguard, Schwab, etc.

Unlike retirement accounts, there are no contribution ceilings, and you can access your funds at any time without age-based penalties (though gains may be taxable), unlike tax-advantage accounts like 401(k) or IRA.

In short: a brokerage account trades some tax perks for maximum freedom.

Why Brokerage Accounts Should be An Integral Part in Everyone's Financial Plan

Maximum Investment Flexibility

Unlike certain specialized accounts, like 401(k), that limit the kinds of assets you can hold, brokerage accounts offer a veritable smorgasbord of investment choices. Whether you're interested in stocks, bonds, mutual funds, ETFs, or even certain alternative investments, the brokerage accounts offer them all. This diversity allows for a tailored investment strategy to meet your specific risk tolerances and financial goals.

No Strings Attached to Withdrawals

Many retirement accounts come with strings attached, like penalties for early withdrawals or mandatory distributions as you age. Brokerage accounts, on the other hand, offer the ultimate freedom. Need to access your funds? They're available without the hefty penalties that can eat into your savings in other types of accounts.

A Home for Mid-Term & Non-Retirement Goals

Uncertainty is the only certainty in life. This is why the flexibility of brokerage accounts shines. They can act as an intermediate savings vessel for goals that aren't quite short-term but aren't decades away either.

Think of things like a dream vacation in five years, purchasing a new car, or even as a supplement to an emergency fund, if need be. The investments need to be structured with a time horizon in mind, with proper portfolios, your brokerage accounts can do it all.

Tax Planning Strategies at Work

While brokerage accounts don't offer the upfront tax breaks that some retirement accounts do, they do provide ample opportunity for strategic tax planning.

Based on what your goals are, you can use these strategies to manage your tax bill through brokerage accounts:

• Tax-loss harvesting: Realize losses to offset capital gains and reduce your tax bill.

• Tax-gain harvesting: Use gains in low-tax years to “fill up” lower brackets or reset cost bases.

  
  

With discipline and planning, you can make a brokerage account highly tax-efficient.

Estate Planning & Stepped-Up Basis

Brokerage accounts can be an essential tool in estate planning, especially when considering the stepped-up cost basis. That means the asset’s value at the date of inheritance becomes their new cost basis, potentially eliminating capital gains tax if they sell immediately. This roll-forward basis is especially powerful on assets purchased long ago at low prices.

Liquidity & Fast Access to Capital

In financial planning, liquidity, the ability to quickly turn assets into cash, is paramount, especially when unexpected expenses arise. Brokerage accounts score high on the liquidity scale, offering a means to quickly liquidate assets when needed, ensuring you aren’t left in a bind when life calls for it.

Security-Based Lending

An often-overlooked feature of brokerage accounts is security-based lending (also known as margin loan or securities-backed line of credit). This allows investors to borrow against the securities in their account, providing an accessible line of credit without selling investments, triggering tax.

This is a powerful tool, especially during times when liquid cash is needed urgently, but selling off assets isn't desirable or might trigger unwanted tax consequences. This is not a feature that’s available on every brokerage account. Oftentimes, it will come with a minimum investment level as well. Nevertheless, it could be very valuable in the right situation.

Tradeoffs & Considerations

No single vehicle is perfect. Here are key tradeoffs to keep in mind:

• Taxable events: Selling appreciated assets or receiving dividends, or interest, triggers taxes on an annual basis.

• No upfront tax deductions: You don’t get the “tax break now” that retirement accounts may offer.

• Behavioral risks: Easy access might prompt impulsive trading; discipline is essential.

• Margin risk: Borrowing against securities magnifies both gains and losses.

Final Thought

If you think of investment vehicles like tools in a toolbox, a brokerage account is your Swiss Army Knife. It may not have the tax “bells and whistles” of specialized accounts, but its versatility, liquidity, and flexibility make it an indispensable tool for real-world financial planning. Integrate it thoughtfully, and it just may become one of your most powerful assets.

If you’re wondering how a brokerage account fits into your broader financial picture, that’s where personalized planning comes in. Schedule a free discovery session to see how flexibility can enhance your long-term strategy.

Disclosure:

All written content on this site is for informational purposes only.Opinions expresses herein are solely those of Savor Financial, a Core Planning brand.All information and ideas should be discussed in detail with your individual advisor prior to implementation. Investment advisory services are offered through Core Planning, LLC.The presence of this website on the internet shall in no direct or indirect way be construed or interpreted as a solicitation to sell or offer to sell investment advisory services.The information contained here is general in nature and is not intended as legal, tax, or investment advice. Further, the information contained herein may not be applicable to, or suitable for, the individuals’ specific circumstances or needs and may require consideration of other matters.CP does not provide legal advice or drafting services.  Estate planning is considered incidental within the context of a financial plan. We will coordinate with your family attorney of choice.  CP is not a certified public accountant and does not provide tax filing services. Tax related advising is considered incidental within the context of a financial plan. We will coordinate with your CPA of choice.