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Taxable & Non-Taxable Accounts

A mistake a lot of people make in my opinion is limiting themselves to just their 401k’s or IRA accounts for investing

Dividend Income Investors Taxable Income and Non-Taxable Income

Brokerage accounts can be either Taxable or non-taxable (actually tax deferred because the government is going to get their share one way or another).

Taxable accounts are straight forward. Any money you earn is taxed. So the Dividends paid or any interest you receive or proceed from the sale of stock will be taxed. Of course there are stipulations to the amount of tax you have to pay on earnings like Short term or Long term gains, Qualified or Non-Qualified Dividends, but it just boils down to how much your tax rate will be.

The tax deferred accounts are either taxed at the beginning or at the withdrawal. A traditional IRA (Individual Retirement Account) defers the tax until you start withdrawing money, traditionally at age 72 in what is called RMD (Required Minimum Distributions) – This is when the government makes you withdraw a percentage each year according to your remaining life expectancy. The advantage of the traditional IRA is that you can accumulate money quicker (Due to compounding) by leaving your money in place, un-taxed for a period of years. The thinking is that when you do take distributions because you may no longer be working you will pay a lower tax rate.

A Roth IRA works similar but you pay tax on the money before you contribute it. Then when you withdraw it at retirement you do not pay money taxes on any money earned in the account.

A mistake a lot of people make in my opinion is limiting themselves to just their 401k’s or IRA accounts for investing. I believe everyone should open a brokerage account in addition to their retirement accounts.  Do not limit yourself when it comes to investing – tax advantaged accounts are nice but you can still do plenty with a taxable account, in fact, I would argue you can do even more because there are no government imposed limits on the taxable accounts.

The point I am trying to make here is that just because you have to pay tax on your earnings does not mean you should not contribute to a taxable account. Even if you are paying out at a 30% tax rate you are still keeping 70% of what you earned ! As an example would you turn down a $200,000 a year job for your present $30,000 a year job just because you will have to pay more taxes? In all likelihood you would not.

Paying taxes are certainly not pleasant and I would venture to guess that even IRS agents don’t like filing and paying taxes but it’s just part of the game. If you are making your financial decisions based solely on potential tax consequences then in my opinion you are making a huge mistake.

So don’t be afraid to open up another brokerage account just because it is taxable. Your pocketbook will thank you.

 

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