3 Reasons I Have a Taxable Brokerage Account – Not Just Retirement Accounts
Should you also have a taxable account?
- Brokerage accounts can be divided into two categories: taxable accounts and tax-advantaged accounts.
- I invest in tax-advantaged accounts to take advantage of the savings they provide.
- I also have a taxable brokerage account.
I believe that investment is the key to creating wealth. I also want to maximize the tax breaks I have to invest for my retirement so that I can get Uncle Sam’s help to secure my future. So I invested in several tax-advantaged retirement plans.
But despite the fact that I have several open retirement accounts, I also have a standard taxable brokerage account.
There are a few main reasons why I opened this type of account and put money into it, even though it doesn’t offer the tax benefits that my retirement accounts do. Here are three.
1. I may need to withdraw the money before retirement age
One of the main reasons I put a substantial amount of money in a taxable brokerage account is that I anticipate that I will have to withdraw some of it before I reach retirement age. I can use the money to cover my children’s school fees, for example, or if I decide to retire early.
If I invested only in a tax-advantaged retirement account, I would be subject to the strict withdrawal rules that apply to such accounts. Typically this would mean that I would incur a 10% penalty if I withdrew my money before reaching the age of 59.5.
I want to make sure I don’t tie up all my money in an account that I can’t access without incurring penalties, and I believe investing in a taxable brokerage account is the best way to do that.
2. There is a limit to tax-advantaged contributions
Another big reason I chose to put money in a taxable brokerage account is that there are limits to how much I can contribute to tax-advantaged plans.
Specific limits vary by account, but there were many years where I maxed out my deductible contributions and still had more to invest. In these situations, a taxable account is the best option I have to be able to purchase assets that can help me earn returns and build wealth.
3. I want a wider range of options
Finally, the last big reason I have a taxable brokerage account is that it gives me more flexibility.
There are a number of different brokerage firms that only provide access to taxable accounts or charge fees for the use of tax-advantaged retirement plans. By keeping money in an account that does not have tax advantages, I can choose to invest with one of these financial institutions if I wish.
I also have the option of using margin to increase my leverage if I choose to do so, which has not been an option with the retirement accounts I have opened in the past. Although I have not yet chosen to do so, I do not want to close this investment technique as a possibility.
Anyone investing for the future should take the time to think about which accounts are right for them. If you’ve earned your employer’s match on a 401(k) and you have money left over to invest, you might also consider putting at least a small portion of it into a taxable account if one of these reasons apply to you as well.
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