Brokerage Account vs. Savings: Which Is Right for You?

Brokerage accounts and savings accounts are both accounts that help you earn a return on your money and save for the future, but they serve two very different purposes. Depending on how much money you have, and how long you can afford to set it aside, one account may be better than the other.

Here's when to use a brokerage or savings account, and how to pick the best account for you.

When to use a brokerage account

A brokerage account is an account used to purchase risk assets -- things like stocks, bonds, and funds. These investments are generally purchased and held for years to help you build wealth for long-term goals like sending a child to college or funding your expenditures in retirement. Therefore, as rule of thumb, a brokerage account is most useful for money you can set aside for the next five years, if not longer.

There are many different types of brokerage accounts you can open:

• Individual retirement accounts (IRAs) -- One of the best ways to save for retirement, IRAs have big tax advantages that can help your money grow larger over time. A traditional IRA is funded with pre-tax money (you deduct your contributions from your taxes), and when you withdraw in retirement, what you withdraw is taxed as income. The alternative is a Roth IRA, which you fund with post-tax money (you can't deduct your contributions), but your withdrawals are tax-free in retirement. No matter which type of IRA you choose, online discount brokers are a great place to open an IRA. (Learn more about the differences between traditional and Roth IRAs.)
  
• Taxable brokerage accounts -- A taxable brokerage account is one that people often use after maxing out their 401(k) at work and an IRA. Gains, losses, dividends from stocks, and distributions from funds are immediately taxable, so taxable accounts have a clear disadvantage over individual retirement plans and other retirement accounts.
  
• 529 plans -- A 529 plan is used to save for college expenses. Because these plans are state-sponsored, the details vary, but the big benefit is that earnings grow tax-deferred, and distributions for qualified education expenses are exempt from federal income tax.
  

The main thing to remember is that brokerage accounts are money you can afford to put at risk to earn a higher return. They aren't a good place for an emergency fund, or savings you're setting aside for a major purchase in the intermediate future.

How to pick a good brokerage account

The discount brokerage industry is highly competitive, as several major brokers all compete on features and pricing to win new customers. It's fair to say that the cost of having and using a brokerage account is getting closer to zero with each passing day. In the 1990s, online discount brokers charged nearly $30 to make a stock trade, which was cheap by the standards at the time. Today most brokers charge less than $7 for the same service.

Here are some things to look for in a brokerage account:

• Low commissions -- Most discount brokers charge between $4.95 to $6.95 per stock trade, so the difference in price isn't all that important unless you plan to trade frequently. Long-term investors may make only a few trades per year, so the $2 difference in trading costs is often less important than other features a higher-cost broker might offer.
  
• Research availability -- Online discount brokers can differentiate themselves by offering research and trading tools you can access through your account online. Just as an example, Fidelity, a broker that many investors like for its research offerings, provides free research on stocks and funds from 12 different independent firms.
  
• Fund selection -- If you plan to invest in mutual funds, the broker you choose can make a big difference. The largest brokers -- Fidelity, Charles Schwab, and TD Ameritrade -- have more than 10,000 funds to choose from, thousands of which you can buy without paying a transaction fee. Schwab is a fan favorite in funds for the fact it offers many funds with no minimum investments.
  
• Account minimums -- Most brokers cater to investors of all experience levels, from beginners to professionals. The best brokers for beginners have no- or very low minimums to get started, which is beneficial for investors who want to start small and build their balances over time.  

If we're being realistic, simply using an online discount broker vs. a higher-cost brick-and-mortar broker is what's important. Whereas trading costs have declined substantially online, old school brokers are still getting away with charging more than $100 a trade, in addition to other hidden fees on mutual funds and other investments.

When to use a savings account

A savings account fits a specific need: It's the place to keep money you may need in the future, but don't need to have right at your fingertips -- that's what checking accounts are for. In that sense, a savings account is a good place for an emergency fund, savings to buy a car, home, or other major purchase, but isn't for money you might need to pay rent next week.

The key advantages of savings accounts are certainty and liquidity. If you put $10,000 into the stock market, it could be worth $11,000 or $9,500 a week later. But if you put $10,000 into a savings account, you can rest assured that, unless you withdraw the money, the balance will only go up every month when interest is calculated and added to your balance.

Savings accounts are truly risk free. That's because the Federal Deposit Insurance Corporation, or FDIC, insures bank deposits, including any interest you earn, in amounts up to $250,000. So, even if your bank makes bad loans or falls on hard times, you won't lose sleep at night over the safety of your deposits.

The disadvantage of this certainty is that savings accounts won't make you rich. Even the highest-yielding savings accounts pay a rate of interest generally less than inflation. Think of a savings account as a way to reduce the impact of inflation, not a way to build wealth over time.

How to pick a good savings account

Savings accounts are mostly a commodity, so there isn't that much of a difference between a savings account other than the brand name. Picking a good savings account largely comes down to finding one with the best mix of all three features below:

• No monthly fees -- Many well-known national banks charge monthly fees just for having a savings account, which are only waived for depositors who keep a lot of money in them. But there are countless banks that have truly free savings accounts, so there's no reason you should ever pay a monthly fee just to have one. When it comes to fees, online savings accounts are especially competitive.
  
• High APYs -- Banks make money by lending out the money you deposit, so you should be sure to collect a piece of the action in the form of interest the bank pays you. Savings accounts rates are usually advertised in terms of an annual percentage yield (APY), which tells you just how much your balance would grow if you left your money in your account for a year without making any additional deposits or withdrawals.
  
• Access to your cash -- It can be advantageous to keep your savings account at the same institution you use for a checking account, but you'll likely have to sacrifice a little bit of interest to do it, since it's rare for a bank to offer the best rates on checking and savings accounts at the same time. The good news? Moving money from a savings account at one bank to a checking account at another bank can be done in a day or two, for free, with just a few clicks online.

Frankly, once you find a bank that doesn't charge a monthly fee and offers a high APY on your savings you've already done 99% of the heavy lifting in finding a good savings account. Because accounts don't vary in any particularly notable way beyond that, those two features are what you should prioritize when shopping for a savings account.