How to Open a (Taxable) Brokerage Account

By Dr. James M. Dahle, WCI Founder

Brokerage account. Non-qualified investing account. Taxable account. All of these are synonyms for the same thing. They are the opposite of a tax-protected account, which is an umbrella term that includes tax-deferred accounts like 401(k)s and tax-free accounts like Roth IRAs.

 

What Is a Brokerage Account?

When investing, it is helpful to think of an account like a piece of luggage and an investment like a piece of clothing. Just like one type of luggage is better for some trips than others, one account is better for a specific purpose than another account. Just like any piece of clothing can go into any piece of luggage, (just about) any given investment can go into any type of account. A brokerage account is an account created at a broker.

 

What Is a Broker?

A broker is simply an intermediary between you and the market. There are lots of brokers out there ranging from mutual fund companies like Vanguard, Fidelity, or Schwab to “straight brokerages” like eTrade, Robinhood, or WeBull that don't offer their own investments.

 

Where Should You Open a Brokerage Account?

My brokerage account is at Vanguard. But I would not have any qualms whatsoever about opening one at Fidelity, Schwab, or eTrade, or TD Ameritrade. I would avoid some of the newer ones, especially the ones that encourage frequent trading and speculative investing like Robinhood or WeBull. You can open a brokerage account at any of these companies.

 

Why Should You Open a Brokerage Account?

If you want to invest more for retirement than you can fit into tax-protected accounts like your 401(k) and Roth IRA, then you should do so in a brokerage account. If you want to invest for something besides retirement, you will also want to use a brokerage account unless there is another tax-protected account for that purpose such as:

• 529s for education
• HSAs for health care
• ABLE accounts for disabled children

 

Pros and Cons of Taxable Accounts

A taxable, non-qualified, brokerage account (hereafter called a taxable account for ease, although I suppose a taxable account also includes any investment outside of tax-protected accounts such as the gold in your safe or the rental home down the street) has many advantages and disadvantages.

 

 

As you can see, the main advantage of a taxable account is flexibility. The main disadvantage is that you usually pay more in tax than if you were investing in a tax-protected account. These taxes reduce your return in the long run. The “tax-drag” (lower return) resulting from having the account taxed as it grows is the main reason why investing in tax-protected accounts is better if you can do it.

 

What Investments Should I Use in My Taxable Account?

As a general rule, if you have opened a taxable account at one of the brokers listed above, you are going to want to use very tax-efficient mutual funds or exchange traded funds in that account. Options frequently used by me and other white coat investors include:

• Vanguard Total Stock Market Fund (or ETF)
• Vanguard Total International Stock Market Fund (or ETF)
• Vanguard Intermediate Municipal Bond Fund (or ETF)

The main reason to use investments like these in your taxable account is that they are very tax-efficient, and thus minimize the tax-drag that you experience in the account.

The process of placing your various asset classes into your various accounts is called Asset Location, and how exactly it should be done varies by person. You really need to draft and follow a written investing plan. If you are also invested in “alternative” investments like real estate, cryptocurrencies, commodities, or precious metals, you also generally invest in these in a non-qualified way—although these types of assets often cannot be placed into the brokerage accounts at the recommended brokers above. You may need additional taxable accounts in order to invest in those types of assets, just like you would need a self-directed IRA or individual 401(k) to invest in those types of assets within tax-protected accounts.

 

Should I Use ETFs or Traditional Index Mutual Funds in My Brokerage Account?

Short answer: It doesn't matter.

Long answer: It still doesn't matter. At least not much. However, with some investments and some accounts, the fees can be higher with mutual funds than with ETFs. For example, if you try to buy Vanguard mutual funds in a Fidelity brokerage account, you will learn that every transaction carries a $50 fee. But if you buy the same exact Vanguard mutual fund in its ETF format in that Fidelity account, you won't pay any transaction fee at all.

Learn more about ETFs versus Mutual Funds here.

 

How to Open a Brokerage Account at Vanguard: A Step-By-Step Guide

Let's say you have decided to open a brokerage and you want to do it at Vanguard. How do you actually open an account, fund it, and select investments for it? Let's take it step by step.

 

#1 Go to Vanguard.com

Simply click on “Open account” and it will guide you through the process of opening an online account.

 

 

Click on the left side to open an account rather than transfer one.

 

#2 Fund the Account

Usually, you're just going to link this new account to your checking account.

Easy peasy.

 

#3 Make Sure You Have an Online Account

At this point, Vanguard needs you to have an online account.

 

 

If you already have one (because you have a Roth IRA or something), then click on the right button. If you don't, then click on the left button, set up your password and email and all that, and then return here for Step #4. It will tell you that you are going to need the following information:

 

 

Don't worry, we'll walk you through it all together. Note that there could be a five business day (one week) delay, so don't be surprised.

 

#4 Provide Necessary Information

Now you just have to click a few boxes.

 

 

Remember, even if you'll probably use the money in this account for retirement, click the “general investing” button to open a taxable/brokerage account. If you click retirement, they'll try to help you open an IRA or Roth IRA. If it's just for you, individual is the right button. If you're married, your spouse is going to appreciate you clicking that joint button. Unlike an IRA (which literally stands for INDIVIDUAL Retirement Arrangement), a taxable account can be individual or joint. Then hit continue.

 

#5 Verify Information

The next two pages will ask you to verify your information and provide your contact information.

 

#6 Financial Info

Now is where you link your bank account and determine how much to move over.

 

 

 

 

#7 Select Investments

Once you have arranged to put money in there you can select your investments. This step looks the same as for an IRA. You'll do this in the future too, but once you get to the page that lists the account, you should see something that looks like this. It may look a little different with your first investment, of course.

 

 

Click on transact and a menu will drop down. If you're like most, you'll be either buying Vanguard funds or trading Vanguard ETFs. Let's do “buy funds” for now.

 

Click “Add another Vanguard mutual fund.” Put in the ticker symbol or name of what you want, and add the amount you want to add to it. I chose my favorite mutual fund in this case. Select where you want the money to come from (usually settlement fund or your checking account) and hit continue. Accept electronic receipt of your prospectus, review and submit the transaction and voila! You now have a taxable account with an investment in it.

 

I hope you found this tutorial helpful. Let me know if you have any questions about it.

What do you think? Do you have a taxable brokerage account? Why or why not? Was this information and tutorial helpful? Comment below!