Starting Up Taxable Investing

I’m Not an Investor That Likes to be Taxed

Up to this point in my life, with the exception of company stock options and the occasional bonus deal from one of the best online stock brokers, I’ve avoided investing in taxable investment accounts. This is mainly because my focus with investing has remained on retirement.

And since there are so many tax advantaged investing options available to me (401k, Roth IRA, Traditional IRA, 529 Plan), I just put my focus there. I love them. I can’t get enough of the concept of sheltering my income. I think to myself, “why on earth would anyone want to invest their money in something that doesn’t involve a tax advantage?” After a bit of research and thinking beyond my own situation, today I’m going to answer that question.

What’s Inside these Different Accounts

As I mentioned last week when I was reviewing the best Roth IRA rates, it’s important to note that for the most part, you are able to invest in the same types of investments in or out of tax advantaged accounts. The account, like a Roth IRA, is just a place to put your investments.

So When Do You Start Taxable Investing?

When You Max Out Your Options – When you’ve maxed out your annual 401K contributions, your Roth IRA contributions, and your SEP IRA contributions, if any are available to you, a taxable account comes next. In fact, after you’ve taken care of these investment accounts, you’re only choice is to move into taxable investing. Of course, that’s a lot of income you are putting towards retirement each year. Does anyone out there max out both a 401K and a Roth?

When You Reach Income Limitations – Secondly, if you earn above a certain amount of money, you will not be able to invest in a Roth IRA. Therefore, after you maxed out the 401K, the next best choice is probably taxable investing.

When You Want Flexibility – Next, and probably the most important point here, is that taxable accounts generally give you more flexibility with how you use your money. Money in a 401K must remain in the 401K until you retire or you will have to pay the taxes on that money, and possibly face penalties for withdrawing early. With taxable investing, you can move your money in and out as you please. A Roth is a bit more flexible than the 401K, but it doesn’t touch the flexibility of the regular old taxed brokerage account.

When You Want to Invest in Tax Free Investments – Lastly, there are apparently some investments types that are tax free (i.e. tax-free bonds) that you can only get in a taxable investment account. If you’re dead set on using these investments, then you’ll have to settle for a taxable account.

Should You Have Both?

I don’t see the harm in having both types of accounts. If you’ve reached one of the milestones listed above than it’s probably time for you to begin with the taxable accounts. However, make sure you have your debt situation under control and a decent emergency fund built up prior to shoving a bunch of extra funds into one of these accounts.

Where to Open a Taxable Investing Account

You can open these up at the same places you open up tax advantaged accounts: at online stock brokers (if you’re going to be active with your trading) or full service investment houses, like Vanguard (if you can meet the initial balance requirements). Live in Canada? Check out this Canadian online stock brokerage comparison.

So what’s your opinion on investing in taxable accounts? Have you started one? Are you waiting to reach some of these other milestones first?



Last Edited: October 28, 2010 @ 2:57 pm The content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. harvestwages says:

    Great post,
    Now i know where i could open a taxable investing account.

  2. I buy Vanguard and iShares ETFs through BAC/Merril Lynch at $0 commissions for 30 trades per month. All I do is buy, and occasionally rebalance my asset allocation. Works well for me. Great way to build wealth.

  3. I was wondering about when I should start to invest in taxable accounts. It seems so intriguing, but you’re right that it’s important to max out your 401(k) and IRA before diving into these.

    So yes, I am waiting to reach a couple of milestones before diving into this–mainly maxing out the above and then paying off student loans. I’m only 20, but I’m aiming to learn as much as possible early on so I can make the best decisions from the start. Thanks for this post and helping me do that!

  4. Thanks, Meghan. Glad it helped. I know I can be a bit hard to follow sometimes, so it’s good to know it made sense to someone.

  5. Invest in a taxable account where you invest you IRA or 401K money. Fidelity for one will combine account totals to give you waved fees. I like to invest in low turnover mutual funds or index funds for a taxable account.

  6. @Paul – That is an awesome tip, man. Thanks for sharing that.