3 Reasons I Have a Taxable Brokerage Account — Not Just Retirement Accounts

Image source: Getty Images

Should you also have a taxable account too?

Key points

  • Brokerage accounts can be broken into two categories: Taxable 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 as well.

I believe investing is the key to building wealth. I also want to maximize the tax breaks that are available to me for investing for retirement so I can get help from Uncle Sam in securing my future. As a result, I’ve invested in several tax-advantaged retirement plans.

But despite the fact I have multiple retirement accounts open, I also have a standard taxable brokerage account as well.

There are a few key reasons why I’ve opened this kind of account and put money into it — even though it doesn’t offer the tax benefits my retirement accounts offer. Here are three of them.

1. I may need to withdraw the money before retirement age

One of the biggest reasons why I put a substantial amount of money into a taxable brokerage account is because I anticipate I will need to withdraw some of it before I reach retirement age. I may want to use the money to cover schooling costs for my children, for example, or if I decide to retire early.

If I invested in a tax-advantaged retirement account alone, I would be subject to strict rules on withdrawals that apply to these types of accounts. Typically, this would mean I’d incur a 10% penalty if I took my money out before reaching age 59 1/2.

I want to make sure I’m not tying up all my cash in an account 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’s a limit on tax-advantaged contributions

Another big reason why I’ve opted to put money into a taxable brokerage account is because there are limits on the amount I can contribute to tax-advantaged plans.

The specific limits vary by account, but there have been many years when I’ve maxed out my deductible contributions and still had more to invest. In these situations, a taxable account is the best option I have for being able to buy assets that can help me earn returns and build wealth.

3. I want a broader array of options

Finally, the last big reason why I have a taxable brokerage account is because it provides me with more flexibility.

There are a number of different brokerage firms that only offer access to taxable accounts or that charge a fee for using tax-advantaged retirement plans. By keeping some money in an account that doesn’t come with tax-advantages, I can choose to invest with one of these financial institutions if I want to.

I also have the option to use margin to expand my leverage if I choose to do so, which hasn’t been an option with the retirement accounts I’ve opened in the past. While I haven’t chosen to do this yet, I don’t want to close off this investing technique as a possibility.

Anyone who is investing for the future should take the time to consider what accounts are right for them. If you’ve earned your employer match on a 401(k) and have additional cash left to invest, you also may want to think about putting at least a little bit of it into a taxable account if any of these reasons apply to you as well.

Using the wrong broker could cost you serious money

Over the long term, there’s been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers – simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.

Leave a Reply

Your email address will not be published. Required fields are marked *