Brokerage Accounts Made Simple

We break down what a brokerage investment account is and why it can be the most flexible place to invest surplus cash after you’ve handled the basics. We explain where it fits in a smart money order, how taxes work, and the real-life situations where it can fund goals without retirement account rules. 

• Defining a brokerage account as a flexible “what’s next” account 
• Using a prioritization list before investing extra cash 
• Comparing brokerage accounts with 401(k) and IRA rules 
• Funding an extended emergency fund with conservative investing 
• Saving for intermediate goals like a home upgrade 
• Investing more after maxing retirement contributions 
• Handling big cash events like bonuses and inheritances 
• Balancing extra mortgage payments with brokerage investing 
• Understanding capital gains tax when you sell 
• Avoiding short-term capital gains when possible 
• Choosing investments based on time horizon and risk 

To learn more about Stansell Wealth Planning visit:
https://www.StansellWealth.com
Stansell Wealth Planning
5550 Granite Pkwy, STE 270  
Plano, TX 75024  
469-606-2040

Transcript

Welcome And What We Cover

Speaker 0:16

Hello, everyone, welcome back. Stansell Wealth Planning Podcast. My name is Cody Stansell, certified financial planner, founder, owner of Stansell Wealth Planning. And if you're new here, this is where we go through all the different aspects that affect your finances. So investments, taxes, estate planning, how to pay off your debt, are we on track for retirement? We just recorded one about Medicare. We're going to record one about Social Security. So everything that you can think of. I appreciate you joining, whether you are listening, whether you are watching on YouTube, thank you for being here. Send this to a friend, send this to a coworker, a family member, whoever it may be. Today's episode, I'm really excited about one of my favorite topics, a brokerage investment account. Okay, a brokerage account is what we call it. I will probably say the word brokerage 50 times in this podcast. So hang with me here. But just the power and the flexibility that a brokerage account has. And we'll so we'll go over those benefits. So first off, we'll dive right in. The a brokerage account, what is it? It's an overlooked and often misunderstood part of investing. Uh, the simplest way that I can define a brokerage account is a what's next account, right? It's a what's next aspect in your investing journey. And if you're listening to this podcast, I put it in air quotes of what's next. It offers the most flexibility for spending, and there's no rules or hang ups from the IRS to invest, right? So a lot of times your retirement accounts, your 401k, your IRA, which I'm a huge fan of, but they have income limits. They have a maximum that you can put in every single year. So there's bells and whistles and there's hang ups of how much you can invest in those accounts, not with a brokerage account. Okay. There are no income limits. I know a lot of you out there, you make too much, too wealthy. Once again, air quotes here, you're too wealthy to contribute to certain account types, whether it's a Roth IRA, you just your income is too high for the IRS to allow you to get those tax breaks and invest in those types of accounts. Once again, not the case with an investment account. Okay, so it's a beautiful thing. It's also the simplest way to think of it. I have surplus cash account. That's the account type. So whether it be your existing bank cash is just more than it should be, and I'll walk through that here in a little bit. Or maybe your cash flow month to month. You got you and your spouse just spend about a thousand dollars less than what comes in, and you just have surplus cash every month. A brokerage account is a great way to utilize that. I walk through who a brokerage account is for, some of the bells and whistles. Once again, if you are new here, or maybe if you're not and you've just forgotten, I have a prioritization list of your cash. So when a client comes to me or a prospect comes to me and says, okay, Cody, what should we be doing with our dollar? We sit down and we go over this list. Okay. For the details, we have an entirely separate episode on this that I go into way more detail. If you go to YouTube and search Stansell Wealth Podcast, and then it's actually our season two, episode one. The title is Your 2026 Money Reset. I go through these, this prioritization list much more in detail. But a quick overview. First thing I want you to do is have a good emergency fund. Three to 12 months worth of expenses. I go through those details in a different podcast. Second one is have all your consumer debt paid off, credit cards, car loans, basically any debt that's not your mortgage. Okay. That's the next thing I want you to do. Once you have a good emergency fund, once you have all your debt paid off, then I want you to save enough for retirement. Once again, if you're listening, I'm using air quotes here. Enough for retirement. How much is enough, you ask? As you can imagine, everyone's a little bit different, right? Sit down with an advisor, myself, anyone else, go over your situation and see what's enough for you, right? So that's the third thing. Once you're doing all of those things, then I want you to definitely have enough life insurance, evaluate how much, what kind. Once again, sit down with an advisor. Then I want you to spend the money to get a properly set up estate plan. So Will's Trust, we have our own Hint House attorney here. Would love for you to meet with her, but of course, use any competent estate planning attorney that you feel comfortable with. But spend the money to have a good plan and go through your situation for yourself in the future, but also your heirs down the road. And then the sixth one is save for a known future expense. So a known future expense, college for your kids, maybe a house you want to upgrade to in the future, who you want to spend this money on something in the future, it's a known expense. Let's be saving up for it, right? A brokerage account comes super in handy here, but I'll get into the that here more in a little bit. Number seven, once you've done all of these things, then number seven is pay enough extra toward the mortgage to be debt-free day one. I go into this a lot more detail in that episode, the podcast episode that is referred to. It's not necessarily we want to be mortgage free as soon as possible, but we want you to be mortgage free the day that you enter retirement. So what monthly amount, what lump sum amount should we be throwing at the mortgage to not have one day one of retirement? Okay. That's number seven. And then the last one: invest surplus cash flow in a brokerage account with whatever whatever's left over each month. Okay. So this episode is mostly on that number eight of once you've done all of those things, save for retirement, saving for a kid's college, paying enough tour mortgage so you're debt-free day one, you have a good estate plan, you have enough life insurance, all these different things. Once you get down to number eight, that is the beauty of a brokerage account. Okay. So that's what this episode is about. So once again, what is a brokerage account? It is not a retirement account. Okay. So it's not a 401k, it is not an IRA. Okay. You can invest in similar things. You can invest in stocks, bonds, mutual funds, ETFs, those types of things. But the account type is not a retirement account. Pros and cons there. There is no tax deduction when you add money to a brokerage account, but there is no time limit. You can touch money in a brokerage account tomorrow, next week, two months, 20 years from now, there is no timeline. Okay. So truly think of it as a savings account, like at a bank, right? A savings account, but you decided to invest that money for potentially more growth. Okay. You can invest it conservatively, you can invest it aggressively, you can invest it somewhere in between, right? So just truly think of a savings account that we want to earn potentially more than a savings account is paying. Okay. So just like a savings account, you there is no limit. You could add a million dollars to your savings account tomorrow, right? Just like a brokerage account, you can add a million dollars to it tomorrow. There is no annual limit like there is with a 401k or with an IRA. Also, like I referred to earlier, this is how the wealthy invest their money because the wealthy earn too much for an IRA or some of these 401k benefits, some of these other aspects that have an income limit. You earn too much for some of these things. But you could make $10 million a year and still add money to a brokerage account, right? So that's the beauty of it. And just like a savings account, you can touch it whenever you want, like I referred to earlier. So who is a brokerage account for? I will walk through about five or six examples of what I see every single day where we walk through these types of things. The most common client that I get or prospect that I get that a brokerage account makes sense is a little bit like I referred to earlier. You have surplus balance in your bank savings and you want to invest a portion of it. Okay. So we call this an extended emergency fund brokerage account, right? So example I would give, you go through the steps that I alluded to earlier. Maybe you say, Cody, I would like to have 50 grand in my savings account. That's just the amount that makes me feel comfortable and warm and fuzzy and rainy day fund and all of that. But you look up and you have $70,000 in the savings account or $90,000 in your savings account, right? Too much, quote unquote, in your opinion. What can we do with that extra money? I would point you back to the prioritization list. Are you saving enough for retirement? Do you have a good estate plan? All those things. But if you check the box, yes, all the way through, then I'd say, let's open up an extended emergency fund brokerage account, and we can invest it conservatively, right? We don't have to be all stock market up, down, volatile like your 401k or IRA. We can invest it pretty conservatively, potentially earn more than your savings account. History definitely shows that you do, but it is a it's a way to make more than your bank savings is paying you, potentially, and but you're earning more, but it's still accessible. You're not adding it to a retirement account that you can't touch until you're 60. Or you're not buying a rental property that it's tied up to that property now. To get any of that money back, you got to sell it, right? So it's very liquid. You can still access it. So that's the most common type that I common scenario that I get from clients is they just have quote unquote, once again, too much cash in their savings account. They want to do something with it. Okay. Second common type that I see from clients is you have an intermediate expense that you're looking to save for. Okay. So most of my clients, when they think of their money, they often think of it in two phases, right? It's either short-term. So your checking account, your savings account, bills you got to pay next month. It's short-term money, like they feel secure with a good emergency fund, and rightfully so. So they think about their money. It's either short-term money or it's long-term money. Are we saving enough for retirement? Are we doing the things, have a good will, have a good life insurance, all the long-term planning? What a lot of people don't really account for is the intermediate term, right? What if what's some an expense that you'll have in three years from now? Is it short term? Not necessarily. Is it long term? Not really either. It's an intermediate. So think of three years, five years, ten years. So a great example of that. I have a current client that they know they want to upgrade their home. Okay, they've had multiple kids, they're outgrowing their current home. And so they can sell their current one and buy another one. So they are investing a couple thousand dollars every month, saving up in a brokerage account. They want to be earning more than what their savings account is paying them. But they know one day they're gonna access all that money to use it in combination with selling their current house to flip it into a bigger and better property, right? So they may one day look up and have 50 grand or 100 grand or 200 grand, whatever it may be, and use that in combination with selling their current house and use it all for their new house, right? So they're using that brokerage account as a way to save up for an intermediate expense. Might be in two years, might be in eight years. They don't know, they want to be patient. And so that's a great way to earmark your cash flow, earmark your money, give it a purpose, give it a name, and but your earning while you're doing it, it's not just sitting in your savings account. Okay. So the third type of client that we see that a brokerage account really makes sense for is if you're already maxing out your retirement plans at work, right? Remember, there's a max that you can add to your 401k at work. And let's say you're maxing out your Roth IRAs or traditional IRAs outside of work and you just want to invest more, right? The IRS won't allow you to invest any more in those account types, but you'd love to invest more. Maybe retire early or have an extravagant lifestyle here in a in a here in a decade or so. A brokerage account, once again, is a great solver of that problem, right? So you're maxing out all your retirement accounts, but you want to invest more. Bing, bang, boom. Once again, you could add $10,000 to a brokerage account, you could add $10 million to a brokerage account. There's no limit there. So that's the third one. Fourth one is you have a big cash event. Okay, so you come into cash. Most common that I see, client sells their house. They sold a business. Honestly, joking aside, you win the lottery, whether it's a $20 scratch or $20,000 scratch off or $500,000 Powerball, whatever it may be, you come into that cash. Maybe it's you got a bonus this quarter or this year, just bigger than you expected. Maybe you received an inheritance. Maybe your mother or grandparents pass away, they had this house or this piece of land, you don't necessarily need it, so you sell it and it comes, you come into some cash, right? And you just don't know what to do with it. You can't put it all into a retirement account, and maybe you even wouldn't want to because of the bells and whistles and the restrictions there. But you come into cash and you want to be able to access it down the road, but you want to be able to make some money on it as well. Brokerage account is a beautiful solution for that. Last one, and here's a very here's probably the most common one, and it's the age-old debate of should with extra cash, should we be paying off our mortgage or investing it? When people say paying off their mortgage or investing it, they're really alluding to investing it into a brokerage account, right? So I say both, right? Everyone's different. If you Google that question, you might get a thousand different answers. I say do both. What do I mean? What do I mean by that? So let me run you through a real life scenario. Let's say you have a monthly surplus. You look at your budget, you guys make you and your spouse make $15,000 coming into the bank account each month, and you spend $14,000, and you're running a $1,000 per month surplus with your money. Okay. What do you do with that cash? If you followed our prioritization list from earlier, baby steps, you go through everything and you get down to seven or eight. I have a lot of clients that say, should we just throw this $1,000 at the mortgage as extra principal? Should I invest it all? And once again, I want to point you back to we want you to be mortgage free day one of retirement. So sit down with a financial planner, go through what that means to you. If you are 50 years old and you want to retire by 65, what extra principal payments each month or what lump sum payment each year to your mortgage get you debt free in those next 15 years? Okay. So sit down with a financial planner, we run the numbers and we determine hey, if you contribute, if you add $700 to your mortgage payment each month, you will be debt-free by the day that you want to retire. Then there is your answer. Do $700 of that dollars, $700 of that money toward your mortgage each every month. The other $300, let's do a brokerage account so it grows and grows, but you can access that money down the road if you really needed it. So that's how we approach it. We don't just say yes or no. It's a let's get you on track here. Okay. And sometimes we sit down with clients and they need to make more than $1,000 per month mortgage payments extra to be debt-free day one of retirement. And that's okay too. Then there's your answer. Let's do that with that cash flow, right? So those are the most common scenarios that I see where a brokerage account makes sense. Here's some of the details that go into it. So taxes and some of those things. How do the taxes work on a brokerage account? What I referred to earlier, there is no tax benefit when you add money to a brokerage account. It's not a tax deduction. Okay. Hint, that's actually why the IRS would let you put in a million dollars tomorrow if you wanted to, because there's no tax deduction. They don't care because there's no tax influence. So there's no impact on your taxes. But anything you make, anything it grows by, is capital gains in the year that you sell it. Okay. So for example, you invest 10 grand into a brokerage account, it grows to 15 grand with just market growth. And you for some reason you say, hey, let's sell everything and we sell it for 15 grand, you'll just have to report that $5,000 of growth as capital gains. You'll have to report it on your tax return. Okay. And warning there, if you own the investment, your capital gain is either categorized as a short-term capital gain or a long-term capital gain. The threshold for that is 366 days. So if you own this asset for 366 days or longer, and then you sell it, that gain will be considered a long-term capital gain. If you buy it and then sell it within the 365 days, it's a short-term capital gain. Why am I even bringing this up? Let me share my screen. For those of you listening, you may want to pause and go to YouTube and start watching this because I go through a little tax planning here. Let's see. Okay. So I'm sharing my screen. These are 2026 numbers. Okay. So 2025 is going to be a little bit different. 2027 next year is going to be a little bit different. I'm just using 2026 numbers. What I'm referring to is if you let's say you and your spouse make $250,000 a year. Okay. That's just your adjusted gross income. Married filing jointly, $20,000, you're in the 24% ordinary income tax bracket. Okay. So if you have a short-term capital gain, it's just going to be taxed at your current tax rate, which in this example is 24%. Okay. But if you wait and sell it when it's a long-term capital gain, you waited at least a year to sell it, that's where you get better tax rates. Okay. So my previous example, married filing jointly, your income is $250,000, right? I'm just making this example up. You're in the 15% long-term capital gain rate. Okay. So you're paying 9% more by just waiting to sell that investment when it's a long-term investment. Okay. And that's a very modest example. Let's say you and your spouse make $450,000 a year. $450, just a short-term capital gain, you're taxed at 32%. Whereas $450, the 15% long-term capital gain bracket goes from basically $100,000 to $613,000 married filing jointly. If you're single, it's still $545. That's a great situation to be in, right? If you really make good income as a single filer. So my previous example, if you and your spouse have a adjusted gross income of $450,000, you're still in the 15% long-term bracket. Whereas your ordinary income and your short-term capital gain bracket is 32%. So you're paying half, less than half tax-wise, if you just wait to make it a long-term gain instead of a short-term gain. So be very wary of that and be very conscious of it. Obviously, having a financial planner, having a professional look over your investments will avoid mistakes like this. Because when a client has a brokerage account and they reach out to me and they say, hey, Cody, we need some money. We need to fix up the house or we want to spend this money. One of the first things we look at when we sell the investments to send them the cash is okay, is there any short-term capital gains in this portfolio? And let's not sell those. Let's sell the long-term capital gains just for the reasons I just showed you. So definitely be wary of that. Be aware of it. That's a big one. So in brokerage accounts, further the details, investment-wise, once again, brokerage accounts are not tied to an employer. So you don't have just 15 or 30 different mutual funds that you can invest it in. Brokerage account, you can invest in anything, right? ETFs, stocks, bonds, money market, crypto, right? So I get a lot of questions on cryptocurrency. Hey, how can we invest it? And yeah, in a brokerage account, you can. So you're not limited to your investment options like a 401k. Okay. You can pick low cost index funds if you wanted to. You can do active management. You can really do any investment option that you like in a brokerage account. So obviously, we have our own investment models. That's what we do, depending on how conservative or how aggressive you want to be. And it's all based on your time. Horizon. Once again, these clients that they know they want to buy a house two years from now and they're saving this money into the brokerage account. We're going to be a little bit more conservative with those investments just because anything can happen in the next two years investment-wise. We don't want that money cut in half by a volatile market, right? But anybody that's anybody's time horizon that's four years, five years, 10 years, give it half a decade or a decade, you're going to make more money being aggressive. So it makes more sense. We have those conversations with clients and we nail that down, obviously, before we make a decision. But just know you don't have to invest it aggressively. A brokerage account, you can still be very conservative if you would like to, and potentially just make more than your bank savings account. So to wrap it up, a brokerage account is a very powerful account type. It's for the what else in life. It's for the what's next. It's for the I have this cash now, what? So it checks a lot of boxes. It's a beautiful thing. The only downside is there's no tax benefit to add money to the account. There is with a pre-tax or a traditional 401k. And also it's not a Roth IRA to where you get tax-free growth. So those account types definitely have their place. There's definitely benefits to 401ks IRAs for the tax purposes. But beyond that, maybe you've maxed them out, or maybe you're doing enough in those retirement accounts, and you want a different account that you want to touch two weeks from now, two years from now, 10 years from now, and you want it to grow. Brokerage Account is a wonderful tool for that. So that's all I had today. Thank you so much for joining me. Send this to anybody else, a coworker that's got a bonus, family member isn't received an inheritance, whatever it may be. Once again, Cody Stansell, certified financial planner. You can find us stancelwealth.com and my email is Cody at stancelwealth.com or give us a call or you can text us. Our office line is a text line as well. 469-606-2040. Thanks again. God bless you. Thank you for listening to the Stansell Wealth Podcast. This podcast is for informational and educational purposes only. It is general in nature and may not apply to your specific situation. Please consult with a professional before acting on any information shared in this podcast pertaining to financial, investment, legal, or tax advice. The views expressed by Cody and his guests do not necessarily represent those of Charles Schwab, Victory Financial Group, or any other organization.