When do taxable investments make sense?

[takeonme]

For context, I’ve got a 401(k), Roth IRA, HSA, and emergency/short term goal savings in money market funds, treasuries, and HYSAs. (All of which I regularly contribute to.) No kids, making mortgage payments (no other debt), not particularly wealthy.

What I’m trying to figure out is when it would ever make sense to invest through a taxable brokerage account.

Intuitively, all I can figure is if I’m maxing out all tax-advantaged accounts & I’m already saving enough for short term goals.

Anything I’m missing?

 

[hjjwosj0]

@takeonme One big reason is that your cash is not locked up until you are old and you have complete freedom to pick what you invest in.

I am now building a portfolio in a taxable account. It has gotten just biig enough to where I supplement my income by using the interest earned monthly to pay off a couple of bills.

 

[takeonme]

@hjjwosj0 That’s a good point. I don’t need the supplemental income now, but I’d need to start building up now I guess if that’s something I’d want in the future, but still before retirement.

 

[deltamagna77]

@hjjwosj0 Why do that instead of letting it compound?

 

[hjjwosj0]

@deltamagna77 I do both. A portion of it is invested in stocks. Of course I reinvest the dividends there. The other portion is in JEPQ and some bonds. That is what I use that to pay a bill or two. Honestly I would be all stocks and just sell covered calls for the monthly income. But the previous crash and the interest rates made me diversify a little.

Also contribute to the account on a monthly basis with any excess cash. Basically it is my "savings" (emergency fund is separate, but my emergency fund is also invested in SPAXX) account.

 

[dmarie725]

@takeonme Long-term capital gains can be taxed at zero if your income is low enough, and is always taxed at less than income. Having some of your retirement in that can be a tax avoidance strategy down the line.

 

[takeonme]

@dmarie725 Interesting. At this point, I’m contributing only to Roth 401(k), Roth IRA, and HSA, none of which (I believe) are taxed in retirement. I imagine that’s almost always better, until I’m maxing those out?

 

[joejord]

@takeonme If you decide to stop working and no where near retirement age, the after tax money will be what you live on until you can tap the pre-tax stuff.

59.5 is the age when you can start pulling from pretax (besides Roth contributions), so consider that in your planning.

 

[dmarie725]

@takeonme Roth is probably best of all worlds. I just checked and Roth distributions don't count as income if you retire early and go on ACA marketplace health insurance and are hoping for income based subsidies.

There are so many issues involving things like taxability of social security, medicare income penalties, and capital gains. Getting a handle on it when you are still in your prime earning years is better than taking a look when you are already locked in, so good on you for exploring.

 

[bellsmom]

@takeonme What’s the alternative if you don’t want to invest your excess funds in traditional brokerage accounts?

Real estate? personal decision but a lot of work for many

HYSA? Bonds? Mattress? we all know why this isn’t the best

 

[takeonme]

@bellsmom Right, so the only thing I could come up with was if I was already maxing out my tax-advantaged accounts and had sufficient emergency/short-term goal funds. I'm currently maxing out my employer-match in the Roth 401(k) as well as my Roth IRA and HSA.

Right now, I'm trying to determine if I should contribute more to the 401(k) (unmatched) or put it in a taxable brokerage.

 

[only2memberfamily]

@takeonme When do you want to retire? I don’t plan on waiting until I’m 59.5

I’ve been investing in my 401k since I was age 19 so it’s healthy. I want to retire at 45 so I’m building up my wealth through real estate and a taxable brokerage to do that, while maintaining my 401(k) so it’ll be ready for me when I’m 59.5.

So basically, tax advantaged accounts are priority #1. Once it’s goals are met I move to investing in taxable accounts

 

[faxlist]

@only2memberfamily But you probably only need about 5 years of living expenses in a taxable account to retire early since you can use a Roth conversion ladder to get funds out of the 401k at age 45. Usually it still makes sense to max out the tax advantaged account(s).

 

[cyd]

@only2memberfamily 100% agree. Taxable accounts give you the ability to retire early. I still max out 401k and backdoor Roth. After that all disposable is going to Taxable account and some to HYSA

 

[faxlist]

@takeonme In probably 99% of cases, it makes the most sense to max the tax-advantaged accounts, lower your taxable income, and enjoy tax-free growth there. You can get those funds out of the 401k early later on if you wish.

 

[yakob123]

@takeonme A) after all the others are maxed and you still want to save more

B) to spend between retirement and Medicaid and keep your AGI and taxes low.

 

[amy333]

@takeonme If taxes marginally keep me from doing things, I’m probably managing my money poorly.

 

[goaztecs]

@takeonme Having liquidity when you need it.

Your car gets totaled and you need a 7 day margin loan from IBKR while you wait for the insurance check to deposit and clear.

For me it’s great to have money in retirement accounts I can’t touch for 30 years but life happens sometimes.

 

[takeonme]

@goaztecs I have emergency fund savings for 6 months worth expenses in money market funds & HYSAs. I believe that’s sorta what you’re getting at? Higher upside on investments, but also lower downside…

 

[goaztecs]

@takeonme Probably. I’ve just come to realize if you’re a diligent saver which if you have 6 months worth of expenses saved up you probably are at what point is it a drag to have so much laying around doing virtually nothing. After doing this for so many years I’ve moved away from X amount of months saved up. If I can invest it instead and have a way to access it without selling shares that’s good enough for me.