Dave Ramsey Recommends Opening a Brokerage Account in These 4 Situations

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  • A brokerage account allows you to invest your money.
  • Brokerage accounts don't provide tax benefits like retirement plans but offer other advantages.
  • There are four situations when finance expert Dave Ramsey recommends opening a brokerage account, including when you invest more than 15% of your income. 

Is opening a brokerage account right for you? 

It is sometimes a good idea to open a brokerage account. You can open one with many different discount online brokers. Most have low or no fees, no commission for buying assets, and a nearly unlimited range of assets you can invest in.  

Unlike retirement accounts, taxable brokerage accounts also come with plenty of flexibility in regard to when and how you can withdraw and deposit money -- although they don't offer tax advantages that IRAs do. 

Not everyone should rush into opening a brokerage account though. To help you decide if doing so is the right choice for you, you may want to consider advice from finance expert Dave Ramsey. 

Ramsey suggests four situations when opening a brokerage account makes sense. Here's what they are.

1. You've already maxed out your retirement accounts 

Ramsey suggests you max out tax-advantaged retirement accounts before you consider opening a brokerage account, because you don't want to pass up on the subsidies that the government provides for retirement savings. 

"Make sure you focus on investing as much as you can in those accounts before turning to a brokerage account," Ramsey said of 401(k) and IRA accounts. "You don’t want to miss out on those tax benefits!"

This is solid advice, as when you are saving for retirement there's no reason not to claim either an upfront tax break in the year you contribute (if you use a traditional IRA) or to claim a deferred tax break if you opt for a Roth account. 

2. You're investing 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 this amount, though, he indicates that it's often appropriate to put this extra cash into retirement savings. However, he suggests you should complete other priorities such as repaying your home mortgage before investing your spare money into a brokerage account. 

"Having a paid-for house opens up a lot of possibilities for you, like investing beyond 15% of your gross income so that you can really run up the score and squirrel away a huge pile of savings for retirement. A brokerage account might be an option, especially if you want to bump up your retirement by a few years," the Ramsey Solutions blog reads.

While most of Ramsey's suggestions are spot on with regard to when you should open a brokerage account, paying off a home loan first before investing probably isn't the best approach since you can usually earn better returns by putting your money into the market rather than paying off your mortgage early. 

3. You're planning for early retirement

Ramsey suggests using a brokerage account is an ideal choice for anyone who wants to retire early, because the money you invest in these accounts is able to be withdrawn tax free whenever you need it -- which you cannot do if you opt for a retirement account instead. 

See, while retirement accounts come with tax breaks, there are also restrictions including a 10% early withdrawal penalty for money taken out before age 59 ½. 

"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’ that will give you an income stream to tap into until you’re able to pull from your 401(k) and IRAs," Ramsey suggests. "Since you can take money out of a brokerage account at any time and for any reason, they’re perfect for bridging that gap!"

This is also great advice, as you don't want to be forced to wait until 59 ½ to take money out of your accounts just because you can't make earlier withdrawals without losing a ton of your money. 

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 aside additional money for retirement. However, the caveat is that you should only put savings into 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 might want to use a regular savings account or a money market account. You won’t earn very much on those accounts, but you won’t be vulnerable to short-term market swings," Ramsey advised. 

This, too, makes sense as when you invest over a short time period, you risk having to sell during a downturn before you've made a lot of profits. This could mean you end up with less than you started with.

So, when you're deciding whether to open a brokerage account, taking Ramsey's advice largely makes sense. If any of these sound like your situation, opting for a brokerage account is probably your best bet.

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