How a Taxable Investment Account Can Be Good for Your Retirement

We’ve been so inundated with the idea of tax-free investment accounts that the taxable investment account’s role in retirement planning is underutilized and overlooked.

If you’re like most Americans, you’ve got at least one and maybe a few retirement accounts. You like the tax benefits that come from having IRA's, 401k's, 403b's, 457b's and defined benefit plans. You know you’ll have to pay income taxes when you start taking distributions from them, except for the Roth accounts, but seeing those accounts grow makes you feel good. And if you have a Roth, you like knowing that even if you aren’t getting a deduction now, distributions will be tax free. But there are other kinds of investment accounts for retirement planning.

As Physician’s Money Digest says in “10 Reasons You Need a Taxable Investment Account,” taxable retirement accounts are ignored because we’re so focused on IRS-approved retirement accounts. But you might think about supplementing your savings with a taxable retirement account. This can be a regular, old-school investment portfolio that’s not linked to any government regulations and that you’re building for retirement.

Here are some of the benefits of a taxable retirement account:

1. You have complete freedom over investments;
2. You’ve got total flexibility over your account;
3. You can use your portfolio as collateral for a loan;
4. You don't have to start withdrawing your taxable account when you turn 70 1/2;
5. You have "basis" in your account, which means when you withdraw money, you pay taxes only on the growth;
6. You only pay a maximum tax rate of 20% on long-term capital gains and qualified dividends (from stock held for at least one year);
7. You can write off capital losses in the account;
8. You can use income from the account to offset an unused investment interest deduction;
9. Your heirs will enjoy a stepped-up basis if they inherit the account from you; and
10. Your heirs don't have to start taking withdrawals from the account when they inherit it from you.

But be aware that taxable accounts aren’t protected in the event of a lawsuit, and you get basis instead of a tax deduction. That should be examined in light of your goals and insurance protection.

So while your non-taxable accounts are your first priority when preparing for retirement, take a look at the possible role that taxable accounts may have in your retirement plan. There may be some gaps that a taxable account can fill, and depending on where your finances are, may be a useful tool in tax planning for short and long term goals.

For additional information related to tax planning and estate planning in Houston, please visit our website.

Reference: Physician’s Money Digest (September 28, 2016) “10 Reasons You Need a Taxable Investment Account”