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?