What Is a Brokerage Margin Account?
With a margin account, you can borrow money to buy investments, and the investments themselves are collateral for the loan. “If you have $100, you could potentially buy more than $100 worth of stock,” Boersen says. “The custodian will give you a loan so you can buy additional stock. You have to pay interest on the loan, but it’s a loan internally, inside your account.”
A margin account allows you to execute CPA more complex trading strategies, such as short selling, but there are risks to using debt, instead of cash, to invest. For instance, if the value of your investments falls, your brokerage firm may ask you to pay back your margin debt immediately—this is known as a margin call. The firm also has the right to sell any of the investments in your portfolio, without advance notice, to cover an account deficit.
Brokerage Accounts vs. Retirement Accounts
Brokerage accounts and retirement accounts both can help you save for the future by providing a way to invest your money in the financial markets. However, there are big differences between these types of accounts, especially when it comes to the range of investing options they offer and tax treatment.
Brokerage Account Flexibility
Brokerage accounts lack the rules and restrictions that govern retirement accounts, like 401(k)s and IRAs, among others. Annual contributions to retirement accounts are capped, there are strict rules on when you can withdraw funds and some retirement accounts may offer a limited choice of investable assets and securities. The latter is especially true in 401(k) accounts.
Brokerage accounts offer much greater flexibility. You may deposit as much money as you want in a brokerage account, and you can invest in any of the assets or securities offered by your broker. “You can put the money in whenever you want, take the money out whenever you want,” Boersen says. “And there’s really no limit on what the investment options are.”
Brokerage Accounts and Taxes
Brokerage accounts and retirement accounts are taxed differently. Contributions to traditional IRAs and regular 401(k)s are made before you pay income taxes on your salary, the balance grows tax-free over time and you pay taxes when you withdraw money in retirement. With Roth IRAs and Roth 401(k)s, contributions are made after you have paid income taxes, the money grows tax-free over time and you pay no taxes when you withdraw funds in retirement.
With brokerage accounts, when you sell an investment for a gain, you pay capital gains taxes. Generally, if you’ve held the investment for more than a year, you’ll pay the long-term capital gains tax rate on the proceeds and if you’ve owned it for less than a year, you’ll pay the short-term capital gains tax rate.
You will owe taxes when you receive income from investments held in your brokerage account, such as dividends or interest, or when cash in your account earns interest. If a stock you own pays out cash dividends or qualified dividends, the proceeds may be taxed. Taxes on interest income from bonds are more complicated.
One tax strategy available to investors with a brokerage account is called tax-loss harvesting. Under certain conditions, when you sell an investment for less than you paid for it, you may use some of the loss to offset other taxable gains in your portfolio.
