Investing in a Brokerage Account

Investing outside of retirement accounts: using a taxable brokerage account as part of your investment strategy.

By Financial Advisor Chris McKeown

A leading indicator of an individual who will successfully build wealth over time is the ability to create margin in one’s life — spending less money than you earn and putting those extra dollars to work. However, where you choose to put those dollars to work can have life-altering impacts.

It's important to have an emergency savings fund of 3-6 months of cash reserves to cover yourself in the event of job loss or unforeseen expenses such as home or car repairs, medical bill, etc. Ideally this cash is in a high-yield savings account where the interest earned is helping maintain the purchasing power of your dollars (i.e. fighting off inflation).

And make no mistake: the more than half of Americans funneling money into employer-sponsored retirement plans (401k, 403b, etc.) or individual retirement plans (Traditional IRA, Roth IRA, SEP IRA, Simple IRA, etc.) are likely to make themselves feel much more secure in their golden years.¹

However, it’s often surprising to find low levels of awareness around another powerful investment vehicle — the taxable brokerage account — which can play a critical role in a well-rounded investment plan.

What is a brokerage account?

A brokerage account is a type of investment account that allows investors to use after-tax dollars to purchase securities (i.e., ETFs, mutual funds, stocks, bonds). Any earnings on your contributions are subject to taxes when you sell those investments, and dividends are also subject to income taxes each year.

Common types of brokerage accounts:

1. Individual - One owner
2. Joint - Two or more owners
3. Trust - Opened and managed in the name of a trust

What are the benefits of opening a brokerage account?

1. No Contribution Limits - Unlike tax-advantaged retirement accounts, a brokerage has no annual contribution limits, meaning an individual investor has unlimited potential to stack up funds and build wealth.
2. Increase Flexibility and Liquidity - Funds can be accessed without penalty or restrictions at any time (although tax implications must be considered).
3. Broader Range of Investment Options - Compared to an employer-sponsored retirement plan, brokerage accounts generally have a substantially larger universe of investment options available. For index fund investing, this offers an opportunity to find extremely low-fee, well-diversified funds.
4. Goals Outside of Retirement - While saving for retirement is paramount, there’s a whole lot of life to live and plan for before reaching age 59.5 or beyond. Brokerage accounts can be a valuable tool to help save for a major purchase such as a house, car, or vacation. They’re also a fabulous place to put extra cash to work that isn’t needed in the short-term.
5. Supplement to Retirement - If you’re following the three tax bucket strategy for retirement, a taxable brokerage account is one of those buckets to prioritize.

As mentioned previously, there are tax implications when trading within a brokerage. Let’s look at two examples below of how these brokerage investments are taxed:

Scenario #1

Maya purchases $10,000 of Stock A in her brokerage account. In the future, the value of Stock A increases to $11,000. Maya decides she wants to sell her entire position in Stock A because she’s buying a new car.

• Because Stock A was worth $11,000 when Maya sold it, she has a capital gain (profit) of $1,000. The length of time in which Maya was invested in Stock A will determine how much she pays in capital gains tax.²
  • Short-term capital gains: If Maya owned Stock A for one year or less, she is subject to short-term capital gains. These are generally taxed at the same rate as one’s ordinary income (ranging from 10% to 37%, depending on income and filing status).
  • Long-term capital gains: If Maya owned Stock A for longer than one year, she is subject to long-term capital gains. This is a more favorable tax treatment of either 0%, 15%, or 20%, also dependent on income and filing status. As you can see, there’s an incentive to buy and hold investment positions for the long-term.

Scenario #2

Brian purchases $10,000 of Stock B in his brokerage account. In the future, the value of Stock B decreases to $9,000. Brian decides he wants to sell his entire position.

• Because Stock B was worth $9,000 when Brian sold it, he has a capital loss of $1,000.
  • This $1,000 capital loss can be used to offset $1,000 in capital gains (i.e., if Brian sold another position for a $1,000 gain, they would offset), OR it can be used to offset ordinary income for the year. The maximum capital loss that can be used to offset ordinary income each year is $3,000. Any losses beyond $3,000 can be carried forward into future years.
  • This strategy is commonly referred to as tax loss harvesting, which can be highly beneficial for investors.

Funding a brokerage account

Brokerage accounts can be opened with as little as $0. If you don’t have a large sum of money to initially invest, an effective strategy for funding this account is either bi-weekly or monthly deposits — what we lovingly refer to as paying yourself first. Automating those contributions, in a similar fashion to a qualified retirement plan, can do wonders for your net worth over the long run.

1. https://www.asppa-net.org/news/2025/3/more-than-half-of-u.s.-households-have-retirement-accounts-crs-says
2. https://www.irs.gov/taxtopics/tc409