Every investor participates in the market for their own reasons. Some, for instance, buy and sell stocks to raise funds for retirement or a child’s education. Others may want to grow their savings and/or take care of immediate medical expenses. Perhaps more importantly, many investors have several objectives in mind, such as sending their offspring to college and retiring. Does this mean that they should open multiple brokerage accounts?
There are hundreds, if not thousands, of brokers that serve consumers. Some of them are local or regional, while others are nationally or internationally renowned. When consumers browse through their offerings (commissions, interest fees, and banking tools, to name a few examples), things could get confusing. This gets even more troubling if an investor picks the wrong account type. To clarify, they may run into issues when they withdraw funds or calculate their profits.
Yet just as any other business, every brokerage firm has its own pros and cons. The one you choose should suit your objectives. Banking tools and portfolio-linked debit cards, as examples, may not be important to long-term investors who withdraw money infrequently. However, consumers that think about the immediate future (such as medical bills), will certainly prioritize a debit card and instant withdrawals. They might even choose a broker that charges commissions in exchange for these banking services, even though many other investors would prefer to avoid trading fees.
Multiple Brokerage Accounts and Goal-Oriented Portfolios
Investors use different types of portfolios to meet certain goals. The most popular types are a 401(k) or IRA, which help households invest their retirement savings.
However, there are also several other purpose-specific accounts. For example, a health savings account (HSA) can cover your co-pays, deductibles, and out-of-pocket medical expenses.
Similarly, parents use a 529 college fund to raise money for their children’s tuition fees and student housing costs, alongside other university-related expenses.
Needless to say, mixing your retirement and child’s educational funds isn’t a good idea. Not only does it make them more difficult to manage, but these portfolios come with their own liquidity requirements, tax rules, and early-withdrawal penalties.
Liquidity and Access
Firstly, almost every HSA portfolio holder has an associated debit card. Why? Since these funds exist to handle medical costs and emergencies, they need to be liquid (i.e. immediately available).
The same could be said about brokerage portfolios that act as a savings account.
A 401(k) or IRA holder, in contrast, doesn’t care less about how quickly they may withdraw their money. After all, the investor only expects to reap these benefits at retirement.
Because of this, you should open more than one brokerage account when you have multiple investment objectives. Otherwise, you will risk limiting your access to the money and incur early withdrawal fees.
Taxes and Penalties
Each portfolio type has its own tax rules. For example, some IRAs allow you to deduct contributions from your taxes. When you withdraw the money upon retirement, that amount (plus any capital gains on investments) is taxable.
Some people prefer a Roth IRA because, although deposits are taxed, they don’t have to pay an income tax during retirement. This portfolio is especially advantageous when account holders expect to generate large returns.
The traditional and Roth IRAs certainly have their respective pros and cons. An investor who is unsure about which one to choose could open multiple brokerage accounts.
In turn, households may make contributions and establish a retirement cashflow plan that suits their needs.
For instance, an account holder wants to reduce their taxable income and move to a lower bracket in a given year. To do so, they would contribute more towards the deductible IRA.
During other years, when the household is capable of making larger payments, they may prefer to pay taxes now and avoid this obligation when they retire through depositing more funds into their Roth IRA.
HSAs, just as with most other medical costs, are not taxed when the money is deposited and withdrawn, alike. So are 529 college plans.
Using a 401(k) or IRA to cover these expenses is certainly not advantageous. Instead, multiple brokerage accounts are more desirable, especially because of the hefty early withdrawal fees that are tied to retirement portfolios.
Similarly, investors incur penalties when an HSA is spent on a non-medical costs or a 529 is used to pay for expenses other than college-related ones.
Combining Positive Aspects
Those who open multiple brokerage accounts may combine the desirable features that different firms offer. Amongst those are commissions, banking services, and interest rates.
For example, let’s assume that an investor wants to open two accounts: A 529 fund and an HSA. Moreover, they narrow down their options to two brokerage platforms.
One of them has advanced banking features, such as a debit card and bill pay tools, but they charge an interest fee on open positions. The second broker doesn’t charge this expense, but they also don’t provide account holders with any banking services.
In this scenario, the investor would benefit when they open multiple brokerage accounts. More specifically, they could use the first firm for their HSA. Why? Because of the debit card and immediate access to cash.
However, equally as important, since HSA portfolios take care of short-term medical expenses, the account holder wouldn’t incur hefty interest fees on open trades.
With a 529 fund, on the other hand, investors are buying stocks to raise money for long-term objectives.
The interest-free portfolio allows you to avoid incurring accumulating interest expenses while doing so. Additionally, its lack of banking features is irrelevant because 529 account holders don’t use their money for urgent needs, such as emergencies.
Crucial Considerations About Multiple Brokerage Accounts
If you decide to open multiple brokerage accounts, there are a few aspects that every investor must bear in mind.
Firstly, some brokers levy inactivity fees on portfolios with a $0 balance or those that don’t witness any withdrawals/deposits after a certain amount of time.
Before going through more than one platform, review your strategy carefully and determine if you truly need a second or third broker. Equally as important, managing several portfolios is a demanding task.
When you create multiple brokerage accounts, consider the time and effort that you need to reach your profit targets.
Otherwise, going through more than one broker is very advantageous for some investors, especially those who have several portfolio types (an HSA and a 401(k), for instance).
Moreover, having multiple brokerage accounts is a great way to combine the positive aspects of different platforms (such as low-commissions and debit card offerings).
What’s next? Look at your current broker and study the characteristics of its portfolio types. After that, compare specific features to what other firms have to offer.
Some investors may open multiple brokerage accounts with the same provider, while others could register with several brokers simultaneously. All of this depends on what you need and how you plan to attain it.