Why complement Retirement investment accounts like 401(k)s, IRAs, Roth IRA’s with a Brokerage account– otherwise known as taxable investment accounts?
The short answer is: Flexibility! Here are some of the advantages that investing in Brokerage accounts provides:
- There are a multitude of investments available in Brokerage accounts including stocks, mutual funds, ETFs, and other assets
- Unlike retirement accounts, which have limitations on contributions each year as well as age-based withdrawal constraints, Brokerage accounts allow investors to contribute and to withdraw money when they want. As a result, Brokerage accounts may be utilized as a vehicle for not only retirement goals but also for other financial planning goals such as a down payment on a home, purchasing a car, or maybe a home renovation project
- Brokerage accounts do not have the same tax benefits as:
- Traditional IRAs and 401(k)s – which enable investors to defer taxes until withdrawals are taken in retirement at then current income tax rates
- Roth IRAs, Roth 401(k)s and Health Saving Accounts – which allow investments to grow tax free as well as to be withdrawn tax free
- Brokerage accounts are taxed when investments make money, such as when a stock is sold for a mutual fund capital gain or dividends are paid. The tax rate depends on the type of transaction. However, for long term investors capital gains tax rates for assets that are held for more than a year are taxed at either 0%, 15% or 20% (depending on your taxable income and filing status). As this tax rate typically falls between tax free assets like Roth accounts and tax deferred assets when withdrawn, it creates yet another opportunity for flexibility through a tax savvy withdrawal strategy in retirement.
- Nobody (well, almost nobody) likes to see their investments lose value in a market downturn. With a brokerage account, however, there is a silver lining in the form of tax loss harvesting:
- Selling an investment at a loss and then buying a similar investment (to maintain your long-term investment strategy intact)
- Realizing a tax loss that will i.) offset against gains; and/or ii.) reduce taxable income up to $3K/yr
- Strategy makes the best out of a down market/investments to save real dollars on taxes
Please feel free to contact a Redwood Wealth Manager or Financial Planner for more information or to discuss your specific financial planning goals and/or questions.
- Nobody (well, almost nobody) likes to see their investments lose value in a market downturn. With a brokerage account, however, there is a silver lining in the form of tax loss harvesting:
