Do you have a Taxable Retirement Account ? Have you even thought about opening one?
Most people are content with their 401K’s, IRAs (Individual Retirement Accounts) or other Tax deferred accounts. All these a a good thing to have but I believe everyone should open Taxable Brokerage Accounts as well.
Limiting ones savings to only a Tax Free account is a huge mistake. It places restrictions on how much you can save. What if you have a windfall of Income one year ? Without a place to put it you might be tempted to view it as “free money” and waste it on things that will not provide future income for you. And if you are following the Dividend Income Investing philosophy and its “Golden rule of Dividend Investing” you are a “Sinner” !
Think about it – Would you quit working just because the government taxes your income – the answer is more than likely No. But thinking about it a little bit more there are still tax advantages to having a Taxable Investing Account. While tax laws constantly change consider these tax advantages even within a taxable account.
Some Dividend income is taxed at a more advantageous rate:
- Long Term Capital Gains ( Investments held more than a year)
- Qualified Dividends
- Stocks that increase in value are not taxed until sold
- Stocks that are inherited and not sold establish a new “cost basis” for the benefactor.
- The Income produced in the Brokerage account does not have Medicare and Social Security taxes taken out like your earned income.
Regardless of the tax consequences though I believe it is foolish not to establish a taxable account because it helps you save even more than you would normally. It also gives you liquidity just in case emergencies arise and helps prevent you from raiding your non taxable accounts.
When you are retired you will be forced to make RMDs ( Required minimum Distributions) from you retirement accounts. What if you do not need all the money that you are required to withdraw? What I plan to do is simply roll it into my taxable account.
Taxable Investing or Brokerage accounts are also a good place park medium term savings for future investments – say buying a home, a business venture or other type of investments. But again remember – If you don’t have to spend your Principle – then Don’t do it !
What are your thoughts ? Do you have taxable accounts in addition to your retirement accounts ? Please share below !