The Value of Taxable Accounts

Although “taxable” is usually not a favorite word, taxable accounts are often an underrated tool in a financial plan. 

A jack-of-all trades in the financial world, these accounts are great for shorter-term goals, such as a family vacation, wedding, or new car. And they can also be used as an important part of your retirement plans, especially for those needing tax diversification or with early retirement goals. 

Taxable accounts are savings accounts that earn taxable income. These types of accounts can also be opened with various types of ownership – both by an individual, multiple persons, or an entity. 

Taxable accounts go by many names, some include:

• Brokerage Accounts: An investment account allowing you to buy and sell investments such as stocks, bonds, ETFs, and mutual funds.
• Money Market Accounts (MMA): An interest-earning savings account with the convenience of a checking account offering checks, debit cards, ATM and electronic transfers.
• Certificates of Deposit (CDs): A CD holds a lump sum at a fixed interest rate for a predetermined time.  
• Trust Accounts: A trust account, set up by a grantor, names an individual or entity (such as a bank or trust company) to manage assets or property on behalf of a beneficiary—often children, other loved ones, or a chosen charity.

Although they may not offer the tax perks of retirement specific accounts, taxable accounts come with their own benefits.  

No Contribution Limits

Whether you’re investing $500 or $500,000, there are no limits on your yearly contributions on taxable accounts – unlike IRAs or 401(k)s which have an annual cap. This is especially beneficial to high income earners, investors who’ve reached the annual cap on non-taxable accounts, or anyone who wants more freedom on how they save and invest.

Wider Investment Options

With taxable brokerage accounts, you typically have the freedom to invest your own way. Choosing from individual stocks, bonds, ETFs, mutual funds, real estate investment trusts (REITs), and more, this opens the door to more personalized and strategic investing than many employer-sponsored retirement plans.

Potentially Tax-Efficient

Although taxable accounts don’t come with built-in tax advantages, certain strategies will effectively manage the taxes.
For example, tax loss harvesting can offset capital gains by selling investments that have depreciated in value.  Holding appreciated investments for at least a year, subjects them to long-term capital gains tax rates—which are often lower than ordinary income tax rates.

In some cases, appreciated assets that are donated to charity could avoid capital gains taxes altogether.

Access to Funds

Taxable accounts give you full access to your money—no strings attached. There's no waiting until age 59½, no required minimum distributions (RMDs), and no restrictions on how the money is spent. 

From various savings goals, building an emergency fund to simply giving yourself more financial freedom, the accessibility is a great advantage to taxable accounts.

Understanding the Tax Side

Because taxable accounts aren’t tax-deferred or tax-free, it’s important to understand how earnings are reported and taxed:

• Realized Capital Gains: Profits earned from selling investments are taxed either as short-term or long-term capital gains, depending on how long the asset was held.
• Dividends and Interest: Earnings from stocks (dividends) and bonds (interest) are typically taxed as ordinary income, unless they are categorized as qualified dividends, which are taxed at a lower rate.
• Annual Reporting: All income earned within a taxable account—interest, dividends, and realized capital gains—must be reported to the IRS and is taxed annually.

Interested in learning more about taxable accounts? Call us today to discuss if this has a place in your financial plan.

Investing involves risk, including the potential loss of principal. BFG and LPL Financial do not provide tax advice. Please consult with your tax advisor regarding your personal situation.