Retirement investing is vital for nearly all Americans. But once you open a retirement investment account, should you also open a taxable investment account? The answer is probably yes, and here are a few of the most important reasons why.
1. To Get Different Options.
Retirement accounts — especially those offered by employers — usually provide limited choices for investments. While this simplifies retirement saving and encourages people to sign up, it means you can't tailor your investments as much. A taxable brokerage account gives you full access to all choices.
2. To Balance Tax Effects.
Retirement accounts like 401(k) plans and most IRAs are tax-advantaged. This means you deduct the contributions from taxable income in the current year. Interest and gains are often untaxed until withdrawal along with contributions. But this can increase tax due during retirement. A taxable investment doesn't provide tax reduction upfront, but it will generally be tax-free when withdrawn. The best strategy often involves both plans.
3. To Maximize Savings.
Do you earn enough to contribute the maximum to your retirement plans? The maximum contribution to most IRAs is only $6,000 while 401(k) plans may be limited to $20,500 (in 2022). But if you can put away more, you're better off. Your best bet may be to switch to funding a taxable investment account once you max out retirement plans.
4. To Fill a Gap.
Want to retire early? This increasingly popular goal comes with additional challenges for those who retire earlier than the standard. You may not have access to Social Security, company retirement plans, and even your 401(k) funds without penalties. Early retirees often use taxable savings to bridge the gap between leaving full-time work and claiming dedicated retirement savings.
5. To Expand Your Skill.
As you gain experience with making financial investments, build skills by expanding your portfolio. You may want to dabble smaller amounts in new opportunities like crypto or emerging markets. You might want to trade rather than buy and hold. Or you might just want to be more actively involved in learning about companies. A taxable account gives you the chance to learn and grow as an investor.
Want to know more about how a taxable investment account can work with your overall financial goals? Start by meeting with a financial planner in your state. They will work with you to identify the best ways to meet your goals and maximize the choices available to you. Call today to learn more.
