Saving in a Brokerage Account

Lesson: Financial Planning for Seniors

Slide 1: Title: "Brokerage Accounts: The 'Flexible' Money."

Many retirees have money in their tax-deferred retirement accounts (i.e. 401k, 403b or IRA). Some may have funds in a tax-free account such as a Roth retirement account and/or Roth IRA. 

But today we're going to talk about another key topic in financial planning, a type of investment account you may not be as totally familiar with - the brokerage account.

Think of a brokerage account as a non-retirement investment account. It's different from your 401(k) or IRA, which are designed specifically for retirement and have a lot of rules.

Picture an IRA with a lock on it, because it's for a specific purpose (retirement) and has restrictions. 

The brokerage account, on the other hand, is like an open wallet—it's for your 'flexible money.

Slide 2 

IRA vs. Brokerage: A Side-by-Side Comparison

When building wealth for your future, you'll likely use either a retirement account, such as an IRA or 401(k), and a standard brokerage account. 

While both allow you to invest in a wide range of assets like stocks, bonds, ETFs and funds, however they are fundamentally designed for different purposes.

Retirement accounts are a powerful tool because they offer significant tax advantages—either your contributions are tax-deductible or your investment growth is tax-free. 

However, this benefit comes with specific rules on how much you can contribute, and penalties for early withdrawals. And age requirement.

In contrast, a brokerage account offers more flexibility. You can contribute as much as you want and withdraw funds at any time for any reason. 

However - The trade-off is that any investment gains will be taxed.

Understanding this difference is important for aligning your investments with both your long-term retirement and your short-term financial goals.

Slide 3: Title: "Brokerage Accounts: The 'Flexible' Money."

The most important part of owning a brokerage account that is different from a retirement account is that -- All the profits you make are subject to annual taxes.

First, let's talk about capital gains. A capital gain is the profit you make when you sell an investment (stock, funds, ETF) for more than you paid for it. The tax you pay on that profit depends on how long you held the investment.

If you sell something you've held for less than one year, the profit is considered a short-term capital gain. This is taxed at your regular, or 'ordinary,' income tax rate, which is the same rate you pay on your taxable income.

However, if you hold the investment for more than one year before selling, it becomes a long-term capital gain. 

These are taxed at a much lower, more favorable rate—currently (2025)  0%, 15%, or 20% depending on your income. This is an advantage. If your filing status is single the taxable income limit is $48,350 and married filing jointly up to $96,700.

Second - You also need to be aware of dividends. Dividends are payments made by a company to its shareholders. 

The key difference between a qualified dividend and an ordinary dividend lies in how they're taxed. 

• Ordinary dividends are taxed at your regular income tax rate, 

• while qualified dividends are taxed at a lower, more favorable long-term capital gains tax rate.

 For example, dividends from money market funds are considered ordinary dividends and are taxed as regular income. Understanding these tax rules is key to using a brokerage account effectively.

Slide 4: Title: Opening a Brokerage Accounts

When you're ready to open an investment account, you'll find that many well-known financial corporations offer a wide range of products and services. Some of the most popular places to open a brokerage or retirement account include Fidelity Investments, Vanguard, and Charles Schwab, etc.

These firms provide a variety of account types to fit your financial goals:

• Standard Brokerage Accounts: These are flexible, taxable accounts. You can use them to invest in a variety of assets, and they are not specifically for retirement. Any gains you make in a standard brokerage account are subject to capital gains taxes.

• Traditional IRA: An IRA is an Individual Retirement Arrangement. With a Traditional IRA, your contributions should be tax-deductible, meaning they can lower your taxable income now. However, you will pay taxes on your withdrawals in retirement.

• Roth IRA: You make contributions with money you've already paid taxes on, often called "after-tax dollars." The big benefit is that when you take qualified withdrawals in retirement, they are completely tax-free.

• 401(k) or 403(b). Many employers use these same financial services providers to manage their employees' retirement plans, offering a convenient way to save for retirement directly from your paycheck.

As you can see on the side, if you are opening a new account – make sure that you look for –

No monthly fees, Low or no trading fees, Low (or no) minimum deposit, Easy to use web site, Easy money transfers & good customer service

Slide 5: Title: " The Three-Bucket Approach"

As we move into retirement, the way we manage our money changes. We want to make sure we have access to cash for our immediate needs while still maintaining some growth potential for the future. I would like to introduce a simple way to help you think about this, which we've broken down into three buckets or categories.

The first bucket is Cash. We recommend keeping about a 3-12 months’ worth of cash for emergencies and living expenses. This is your safe, liquid money. You want to store this in high-yield, low-risk places like a high-yield savings account, a money market account, or even a mutual fund of short-term U.S. government bills. This ensures you're not forced to sell your long-term investments during a market downturn to cover your daily expenses. This bucket is usually located in a taxable brokerage account.

The second bucket is Bonds. As you get older, your portfolio should have a certain percentage in bonds. Bonds are less risky than stocks and can generate a steady stream of income. This is money in less-risky investments that generate income and can often be found in your retirement accounts. This bucket is usually located in a tax deferred account.

The third bucket is for Growth/Long-Term investments. This is where your long-term growth investments, like stocks, go. This money is usually held in your tax-advantaged accounts like your IRA, Roth IRA, or employer retirement plans. Since these are long-term investments, they have time to recover from any market downturns. This bucket is usually located in a Roth and/or tax deferred accounts.

Slide 6: Title: "Summary: Brokerage Accounts."

Let's recap our discussion on brokerage accounts.

First, they are great for flexibility and liquidity. This is their biggest advantage. You have full control over your money and can access it whenever you need to.

Second, they are subject to taxes on gains and income. This is important thing to remember. The tax treatment of capital gains and dividends is the main difference between these brokerage accounts and retirement accounts.

Finally, they are best used in conjunction with a diversified retirement plan. Think of a brokerage account as a powerful addition to your overall financial strategy, not a replacement for your retirement accounts.

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