30 Day Investing Challenge, Day 9: Choose A Brokerage Firm
One of the unsung heroines of the investing world is the brokerage account. Most people talk about workplace retirement accounts or IRAs, but not a lot is said about brokerage accounts because they’re not “tax advantaged.” This simply means when you invest in a brokerage account you can’t deduct the amount you contribute and you pay taxes on the gains when you sell. However, you do get one tax advantage: really, really, low tax rates on long term capital gains.
Let me back up a bit and explain what I mean by “long term capital gains.” Whenever you invest in any account and your investments grow this is called “capital gains.” You’re gaining on the capital you invested, get it? This is a term I can get behind because it makes sense. A lot of financial jargon often doesn’t.
Moving on! There are two types of capital gains: short term and long term. When it comes to brokerage accounts this means whether or not the money invested has been in the account for over a year. Short term means less than a year invested, long term means more than a year invested. Each gain is taxed differently: short term capital gains are taxed as ordinary income, whereas long term capital gains have their own tax structure, which is where the magic lies. Here are two charts that show the current 2024 tax brackets (for your short term capital gain reference) and the 2024 long term capital gains tax rates:
As you can see, if you’re married, retired, and have investments in a brokerage account you could pull out just over $94,000 a year without paying a single dime in taxes. WHAT! That’s just nuts (in a good way).
So what’s the best brokerage account firm? I recommend either Vanguard, Fidelity, or Charles Schwab, the top 3 discount brokerage firms. There isn’t much difference between them, except that Vanguard isn’t owned by a majority shareholder group, meaning their purpose is to serve the individual investors. This allows them to keep prices low across all of their products. I emphasize all here because companies like Fidelity and Schwab also have very low cost index funds and ETFs, but because they serve a board of directors and minority shareholders their main goal is to make money, which means they could decide to raise prices on you someday. Also: Vanguard was founded by the index fund guru himself, Jack Bogle. Can you tell which firm I lean towards?
One way to choose a brokerage firm is by the investments they offer. Here’s a breakdown of the different total stock and S&P 500 funds at each brokerage:
Another way to choose a firm for your brokerage account is selecting one you already have other accounts at (like a 401k or IRA) and that has investments you like. It doesn’t have to be Vanguard, Fidelity, or Schwab, however make sure the firm you choose has expense ratios similar to the above and no other hidden fees (refer back to yesterday’s post about different fees).
Action Step: Pick A Brokerage Firm
Based on the above advice, write down which brokerage firm you would open investment accounts with. You don’t have to open anything yet (we’ll get there), but you want to have the company in mind for when you do.
Check back in tomorrow for your next challenge: what accounts to use for short term goals.
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