4 Reasons to Open a Taxable Investment Account

Posted on: July 25th, 2017

It’s true: Investing in tax-advantaged accounts can help you save. Maybe you use an IRA or 401(k) for retirement, a 529 plan for college and a health savings account (HSA) for health expenses. But does that mean you should shun investing in a taxable brokerage account? Not at all!

While tax-advantaged accounts can reduce the tax burden on your savings, they also come with restrictions that make them less than ideal if you want more flexibility in how and when you can use your money without penalty. In many cases, it’s sensible to invest in both tax-advantaged and taxable accounts.

4 Benefits of Taxable Accounts

  1. Flexibility. You can access money in a taxable investment account at any time with no penalty and no income tax – no strings attached. The downside is that you may owe capital gains tax if your investment has appreciated. However, as long as you hold your investments for more than a year, you’ll pay the long-term capital gains tax rate, which is lower than your income tax rate.
Your income tax bracket Long-term capital gains tax rate (for most gains)
10 or 15 percent 0 percent
25, 28, 33 or 35 percent 15 percent
39.6 percent 20 percent
  1. Tax-loss harvesting. Any capital losses in your account can offset capital gains, dollar for dollar, on your income tax return. In addition, you can use up to $3,000 of excess losses to offset ordinary income, and amounts greater than $3,000 can be carried forward to offset income in future years.
  2. More control over taxes in retirement. Having a variety of account types enables you to manage your tax bill in retirement by strategically choosing accounts from which to take distributions. Withdrawals from traditional IRAs and 401(k) plans will be taxed as ordinary income, distributions from Roth accounts may be tax-free (if certain requirements are met) and the sale of investments in a taxable account may result in capital gains tax rather than income tax. If you’re nearing the top end of your tax bracket, you might choose to take money from taxable or Roth accounts. Doing so could not only lower your income tax, but also keep your capital gains tax rate lower (see No. 1 above).
  3. Potential tax savings for your heirs. If you leave a taxable account to heirs, they will receive a step-up in basis on the investments: When your heirs eventually sell the investments, they’ll be taxed only on the change in valuation since the investments were inherited. Your heirs won’t owe tax on any appreciation that occurred during your lifetime.

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To learn tax-smart strategies for dividing your investments between taxable and tax-advantaged accounts, contact your Seaside Client Advisor.