How to choose the wrong brokerage account could cost you money
If you want to invest, you will need a brokerage account. But there are many types of brokerage accounts that you can open, and choosing the right one is crucial. If you make the wrong choice, you could end up costing you hundreds or even thousands of dollars over your lifetime as an investor.
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Choosing the wrong account could be a costly mistake
Choosing the wrong brokerage account could end up costing you money, as some accounts offer tax benefits, but others don’t.
If you’re investing for retirement, for example, you’ll probably want to put your money in one of the tax-efficient accounts rather than a taxable brokerage account. In doing so, you could either receive a deduction for the money you contribute or withdraw money from your account tax-free as a retiree. Your money can also grow over time without you having to pay capital gains on investments every time you sell one at a profit.
The tax savings offered by these retirement accounts can be substantial. Suppose, for example, that you opt for a traditional IRA that allows you to make deductible contributions. In 2021, you can deduct up to $ 6,000 in contributions you make, or $ 7,000 if you are eligible for catch-up contributions if you are over 50. Since you can deduct this amount from your taxable income, provided you meet the qualifications, you will not owe a share of it to the IRS.
If you are in the 22% tax bracket and avoid having to pay taxes on $ 6,000, you reduce your tax bill to as much as $ 1,320. If you haven’t invested in an IRA and instead put money for retirement in a taxable brokerage account, you could end up missing out on this deduction. The $ 1,320 in savings means that your contribution to your retirement account will actually cost you only $ 4,680 due to government funding for the investment.
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It is much easier to invest when you benefit from this tax savings and there is no reason to miss it if you know you are going to use the money you save for your later years. But if you choose the wrong type of brokerage account, that is exactly what could happen.
On the other hand, if you need the money you are investing for any purpose other As retirement, you wouldn’t want to choose a tax-advantaged account like an IRA that has limits on your withdrawals because you would likely be hit with a 10% penalty if you withdraw the money before retirement age. In this case, a taxable brokerage account would be a better bet.
You will also have to choose between traditional accounts which offer initial tax relief and Roth accounts which do not provide tax deductible contributions but allow you to withdraw money tax free as a retiree. If you expect your tax bracket to be lower as a senior, choosing a traditional IRA could provide you with significant tax savings, although the specific amount will depend on the difference in your income. tax rate.
Research each type of account carefully, learn the rules for investing, taxing, and withdrawing, and make sure you choose the account that best suits your needs. This is the best way to make sure that the brokerage account you have chosen is right for you.