Dollars & Sense: Consider the Brokerage Account

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With IRA’s and 401(k)’s garnishing the most attention in the investment community, investors forget about the value offered from opening a good old-fashioned brokerage account. Most questions submitted by young professionals to the talking heads for leading money magazines and news channels deal with contributions to retirement accounts because that is what has been drilled into their psyche at an early age. Everyone hears “make sure you contribute to your 401(k) when you get that job” or  “the tax breaks for contributing to an IRA are wonderful.” And you know what, that advice is really good and I do recommend contributing as much as you can to your retirement accounts, but you need to diversify your investment accounts just like you diversify your investments in those accounts.
 
So let’s consider the benefits of a regular brokerage account. One aspect of a brokerage account that is especially important in severe recessionary times, such as now, is the ability to withdrawal your contributions at any time without any penalties. Consider this: If you need an additional $5,000 for living expenses because of a job loss and you take this from your traditional IRA you will not only have to pay taxes at your current rate but also a 10 percent penalty on the money you withdrawal. If you invest funds in a brokerage account then all you need to do is sell any investments to raise the cash and request a check or an electronic funds transfer (EFT) directly to your checking account. Most companies do not charge for an EFT transfer, and they usually take 48 hours. The only additional expense would be any commissions for selling, which is usually $7-10 dollars depending on which company you use.
 

But what about a savings account for excess cash? Outside of a checking account a savings account is the most liquid. I always recommend that a savings account be funded to cover six months of living expenses, but that is rarely realistic for younger people due to lower income and high expenses. Moreover, the interest rates these days might as well be zero. Banks are paying somewhere around 0.05 percent interest--some higher, some lower--but it isn’t enough to keep up with inflation, which has been right around 1 percent recently.

 
There are risks, of course, investing in stocks, bonds, exchange traded funds (ETF's) or any other “non principle guaranteed” investments--that’s why they are called investments. Stay within your comfort zone for risk and don’t invest in something you don’t understand. Look at Fidelity or Charles Schwab as they do a very good job of working with the average retail investor. I’ve found that these companies provide an easy to use Web site with everything you need to get started.
 
Read more from Nick on managing your money, or contact him with your questions.
 
Nick Wychocki works for Global Wealth Consultants, a registered investment advisory firm, as their Senior Wealth Strategist.  He has worked there for six years in beautiful Naples, Fl., after having cut his teeth in the currency options pits of the Chicago Mercantile Exchange. He is a CFP certificant and a graduate of the University of Florida’s MBA program.
 
(Photo credit: alancleaver_2000; C.C. 2.0)