Dave Ramsey recommends opening a brokerage account in these 4 situations
Sometimes it makes sense to open a brokerage account. You can open one with many different discount online brokers. Most have low or no fees, no commissions for buying assets, and an almost unlimited range of assets you can invest in.
Unlike retirement accounts, taxable brokerage accounts also offer great flexibility in when and how you can withdraw and deposit money, although they do not offer tax advantages unlike IRA.
However, not everyone should rush to open a brokerage account. To help you decide if this is the right choice for you, you might want to consider some advice from financial expert Dave Ramsey.
Ramsey suggests four situations when opening a brokerage account makes sense. Here is what they are.
1. You’ve already maxed out your retirement accounts
Ramsey suggests maximizing tax-advantaged retirement accounts before you consider opening a brokerage account, because you don’t want to pass up government subsidies for retirement savings.
“Make sure you focus on investing as much as possible in these accounts before turning to a brokerage account,” Ramsey said of 401(k) and IRA accounts. “You don’t want to miss these tax benefits!” »
That’s good advice, because when you’re saving for retirement, there’s no reason not to claim initial tax relief in the year you contribute (if you’re using a traditional IRA) or to claim tax relief. deferred tax if you opt for a Roth account. .
2. You invest more than 15% of your income
Ramsey urges people to put 15% of their income into retirement accounts. Once you’re ready to save more than that amount, however, it indicates that it’s often appropriate to put that extra money into retirement savings. However, he suggests that you should accomplish other priorities such as paying off your mortgage before investing your spare money in a brokerage account.
“Having a paying house opens up a lot of possibilities for you, like investing beyond 15% of your gross income so you can really up the score and save a huge stack of savings for retirement. A brokerage account could be a option, especially if you want to increase your pension by a few years”, Ramsey Solutions blog reads.
While most of Ramsey’s suggestions are right on when you should open a brokerage account, paying off a home loan before investing is probably not the best approach, as you can generally get better returns. by putting your money on the market rather than paying off your mortgage sooner.
3. You are planning an early retirement
Ramsey suggests that using a brokerage account is an ideal choice for anyone looking to retire early because the money you invest in these accounts can be withdrawn tax-free whenever you need it. what you can’t do if you opt for a retirement account. In place.
You see, while retirement accounts come with tax breaks, there are also restrictions, including a 10% early withdrawal penalty for money withdrawn before age 59.5.
“To avoid giving Uncle Sam a huge chunk of your nest egg, you might want to set up a brokerage account as a ‘bridge account’ which will give you an income stream to tap into until you can pull from your 401(k) and IRAs,” Ramsey suggests. “Since you can withdraw money from a brokerage account at any time and for any reason, they’re great for bridging that gap!”
This is also good advice, because you don’t want to have to wait until 59 ½ to withdraw money from your accounts just because you can’t make withdrawals earlier without losing a ton of money. silver.
4. You’re saving for long-term goals
Finally, Ramsey says you can use a brokerage account for other long-term savings goals, not just putting money aside for retirement. However, the caveat is that you should only place savings in a brokerage account if you don’t plan to use the money for a while.
“For savings goals that will take less than five years, you may want to use a regular savings account or a money market account. You won’t earn much on these accounts, but you won’t be vulnerable to fluctuations. short-term market swings,” Ramsey advised.
This too makes sense, because when investing for a short period of time, you may have to sell during a downturn before you’ve made much profit. It could mean that you end up with less than you started with.
So when deciding whether or not to open a brokerage account, following Ramsey’s advice largely makes sense. If any of these sounds like your situation, going with a brokerage account is probably your best bet.
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