Why open a taxable account?

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cam240
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Joined: Tue Jun 27, 2017 1:16 pm

Why open a taxable account?

Post by cam240 » Thu Feb 22, 2018 4:50 pm

Hello Community,

Today I am asking an open question for some arguments as to why open a taxable brokerage account? Both wife and myself contribute to our 401Ks and have 2 Roth accounts (one for each :) ) in which we also contribute to the max as well. I read a lot of folks here use their brokerage account to keep cash and invest (obviously). But we keep our cash (emergency fund) in our savings account. The benefits I see:
- Invest spare cash after maxing out Roth accounts and get a greater variety of investment choices than what is offer on our 401Ks.
- Money can be withdrawn at any time (which is why some folks used to stash their emergency fund I assumed)

P.S: My wife technically already has a brokerage (prior to us even knowing each other) and she has $0.1 balance in it haha. I researched and we could just turn in into a joint account (her account is also with the same company for our Roth and 401Ks so that is nice). So I mean I could add myself online in a heartbeat but I just want to understand that after contributing a high amount to both of our 401Ks (hopefully maxing them out on our first full year of full time employment), maxing out both Roth, what is left to do on the brokerage account?

After April there will be no Debt left to contribute towards or pay off.
MFJ (22%)
Age:21-22

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catdude
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Re: Why open a taxable account?

Post by catdude » Thu Feb 22, 2018 4:56 pm

Generally you can't withdraw funds without penalties from 401k's and IRA's before age 59.5. If there's any chance you'll want to retire at say, age 55, a taxable account will come in really handy.
catdude | | "I yield to the gentleman for a few feeble remarks." (Congressman Thaddeus Stevens)

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triceratop
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Re: Why open a taxable account?

Post by triceratop » Thu Feb 22, 2018 4:58 pm

catdude wrote:
Thu Feb 22, 2018 4:56 pm
Generally you can't withdraw funds without penalties from 401k's and IRA's before age 59.5. If there's any chance you'll want to retire at say, age 55, a taxable account will come in really handy.
This is untrue; You can withdraw from these accounts prior to age 59.5 penalty-free by following IRS rule 72(t).
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

MathWizard
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Re: Why open a taxable account?

Post by MathWizard » Thu Feb 22, 2018 4:59 pm

There are some people who make a very large amount of money want to save more than they can in 401Ks and IRAs.

For others, their 401Ks have huge ERs, so a taxable account at Vanguard could be preferable.

Not everyone can max their 401Ks and IRAs in their 20's.
With current limits, it's amazing that anyone can, kudos to you.

Most people are climbing out of college debt even into their 30's. I myself got a PhD and had a negative net worth at 31.
Of course, investing in my human capital paid off, but I had many years when I could not max out tax advantaged funds.

financeidiot
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Re: Why open a taxable account?

Post by financeidiot » Thu Feb 22, 2018 5:00 pm

In general, taxable accounts are for:
1. People who have already maxed out their tax advantaged space (401k, IRA, HSA, etc.) and want to invest more.
2. People who want to invest for shorter-term goals than retirement and avoid paying a penalty for early withdrawals.
3. People who want to be able to harvest tax losses for risky investments.
4. People who want to invest in something that they cannot through the use of a tax advantaged account. For example, your 401k may have limited or expensive investment options or you want to purchase a home. You can't live in a home purchased through your IRA.

There's more information on the pros/cons of investing in taxable accounts here:
https://www.bogleheads.org/wiki/Tax-eff ... e_accounts

uberdoc
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Re: Why open a taxable account?

Post by uberdoc » Thu Feb 22, 2018 5:01 pm

Because people save and invest money after maxing out 401K, IRA and emergency fund.

neilpilot
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Re: Why open a taxable account?

Post by neilpilot » Thu Feb 22, 2018 5:04 pm

Maybe I've missed your point. Assuming you have funds to invest in excess of the IRA, 401k and Roth limits, funds a taxable account simplifies the paperwork process if the option is to mingle pre and post tax funds in your tax sheltered account. You then also gain the tax advantage of LT capital gains.

essbeer
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Re: Why open a taxable account?

Post by essbeer » Thu Feb 22, 2018 5:17 pm

cam240 wrote:
Thu Feb 22, 2018 4:50 pm
So I mean I could add myself online in a heartbeat but I just want to understand that after contributing a high amount to both of our 401Ks (hopefully maxing them out on our first full year of full time employment), maxing out both Roth, what is left to do on the brokerage account?
Or conversely, what is there left to do with a bank account? You can withdraw money from your brokerage at any ATM, you can write checks. You can pay your credit card right out of your brokerage account. You get better rates on your cash and more investment options.

JBTX
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Re: Why open a taxable account?

Post by JBTX » Thu Feb 22, 2018 5:19 pm

cam240 wrote:
Thu Feb 22, 2018 4:50 pm
Hello Community,

Today I am asking an open question for some arguments as to why open a taxable brokerage account? Both wife and myself contribute to our 401Ks and have 2 Roth accounts (one for each :) ) in which we also contribute to the max as well. I read a lot of folks here use their brokerage account to keep cash and invest (obviously). But we keep our cash (emergency fund) in our savings account. The benefits I see:
- Invest spare cash after maxing out Roth accounts and get a greater variety of investment choices than what is offer on our 401Ks.
- Money can be withdrawn at any time (which is why some folks used to stash their emergency fund I assumed)

P.S: My wife technically already has a brokerage (prior to us even knowing each other) and she has $0.1 balance in it haha. I researched and we could just turn in into a joint account (her account is also with the same company for our Roth and 401Ks so that is nice). So I mean I could add myself online in a heartbeat but I just want to understand that after contributing a high amount to both of our 401Ks (hopefully maxing them out on our first full year of full time employment), maxing out both Roth, what is left to do on the brokerage account?

After April there will be no Debt left to contribute towards or pay off.
MFJ (22%)
Age:21-22
Just so I understand, what do you see as an alternative?

Save the money in bank?
Just spend it because you think you are saving enough already?


I would say the benefits of having a taxable account are:

They provide you with additional available funds if you want to retire early
They are a way to acccumulate long term wealth but still have some level of liquidity for major purchases and expenses down the road
Saving for kids college, to the extent outside of 529s

You can either invest is some stocks and bonds if you plan not to touch it long term (at least 5-10 years ) or put it in something like ibonds or CDs as an extra cash reserve.

Trev H
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Re: Why open a taxable account?

Post by Trev H » Thu Feb 22, 2018 5:25 pm

When you fill up your tax free (roth) and tax deferred (401k/403b, etc) space... you have to use taxable space next.

This may not be as common as it once was... but some poor folks have really stinky company plan's (very expensive investment options)... and in extreme cases you can be better off investing in taxable space rather than your extremely expensive company provided plan.

If you already have a checking account or savings account that earns interest.. then you already have a taxable account. You will get a 1099-INT.

At some point you may end up selling a home, or getting an inheritance, and have a big chunk of cash on hand... your tax free and tax deferred space is full... so you chunk it into taxable space (as tax efficiently as you possibly can).

It is not unusual for youngsters to have no need for taxable investments past a interest bearing savings or checking account... but as you go on in life... you will get there.

Trev H

cam240
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Joined: Tue Jun 27, 2017 1:16 pm

Re: Why open a taxable account?

Post by cam240 » Thu Feb 22, 2018 5:30 pm

JBTX wrote:
Thu Feb 22, 2018 5:19 pm
cam240 wrote:
Thu Feb 22, 2018 4:50 pm
Hello Community,

Today I am asking an open question for some arguments as to why open a taxable brokerage account? Both wife and myself contribute to our 401Ks and have 2 Roth accounts (one for each :) ) in which we also contribute to the max as well. I read a lot of folks here use their brokerage account to keep cash and invest (obviously). But we keep our cash (emergency fund) in our savings account. The benefits I see:
- Invest spare cash after maxing out Roth accounts and get a greater variety of investment choices than what is offer on our 401Ks.
- Money can be withdrawn at any time (which is why some folks used to stash their emergency fund I assumed)

P.S: My wife technically already has a brokerage (prior to us even knowing each other) and she has $0.1 balance in it haha. I researched and we could just turn in into a joint account (her account is also with the same company for our Roth and 401Ks so that is nice). So I mean I could add myself online in a heartbeat but I just want to understand that after contributing a high amount to both of our 401Ks (hopefully maxing them out on our first full year of full time employment), maxing out both Roth, what is left to do on the brokerage account?

After April there will be no Debt left to contribute towards or pay off.
MFJ (22%)
Age:21-22
Just so I understand, what do you see as an alternative?

Save the money in bank?
Just spend it because you think you are saving enough already?


I would say the benefits of having a taxable account are:

They provide you with additional available funds if you want to retire early
They are a way to acccumulate long term wealth but still have some level of liquidity for major purchases and expenses down the road
Saving for kids college, to the extent outside of 529s

You can either invest is some stocks and bonds if you plan not to touch it long term (at least 5-10 years ) or put it in something like ibonds or CDs as an extra cash reserve.
Definitely not the "spending it". You can never save enough. I guess yes keeping it in the savings account was my thought but a lot of the arguments make sense in favor of having one. Not so much for right now but for the future.

cam240
Posts: 75
Joined: Tue Jun 27, 2017 1:16 pm

Re: Why open a taxable account?

Post by cam240 » Thu Feb 22, 2018 5:36 pm

I tried posting this earlier but it seems like it did not go through.... so here I go again "thanks for all the comments and links. All the arguments to have the taxable account make sense to me. Throwing a curve ball out there, what about an HSAs? My wife happened to mentioned it today and that we should look into them. What I quickly gathered for the HSAs.

- Tax deductible
- No carry over limit
- Can be withdrawn any time for qualified expenses
- Can be invest in
What else is key and basic to know about these accounts?

I know you have to qualified under a HDHP , what is your plan stops being HDHP? Most importantly can this HSAs balance be rollover into a Roth IRA.

Thanks,

(hopefully it will post this time haha)

GoldenFinch
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Re: Why open a taxable account?

Post by GoldenFinch » Thu Feb 22, 2018 5:46 pm

An HSA great if you have access to one.

The idea is fill up or max out ALL tax advantaged space if you can. If, as time goes on, you make enough money so that you can max out all tax advantaged space and save even more, then you invest that extra savings in a taxable account and grow that money.

barnaclebob
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Re: Why open a taxable account?

Post by barnaclebob » Thu Feb 22, 2018 5:47 pm

Personally I think its a good idea to have maybe 5-10% of your net worth in taxable investments even if you aren't maxing out retirement just in case you need a decent amount of cash in a few days time. Its also my opinion that there is no need to keep 6 months expenses in a savings account if your taxable investments are large enough, just modulate the asset allocation as needed.

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triceratop
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Re: Why open a taxable account?

Post by triceratop » Thu Feb 22, 2018 5:50 pm

neilpilot wrote:
Thu Feb 22, 2018 5:04 pm
Maybe I've missed your point. Assuming you have funds to invest in excess of the IRA, 401k and Roth limits, funds a taxable account simplifies the paperwork process if the option is to mingle pre and post tax funds in your tax sheltered account. You then also gain the tax advantage of LT capital gains.
Relative to a post-tax tax-sheltered account the LT capital gains are a negative not an advantage.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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yukonjack
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Re: Why open a taxable account?

Post by yukonjack » Thu Feb 22, 2018 5:51 pm

Just before reading your last post I was going to strongly suggest an HSA. This is another way to sock away tax deferred money especially since you are young and presumably healthy. If you have enough money to pay your medical expenses out of pocket and let the HSA grow over the years it could workout even better. As for the after tax brokerage account I would recommend investing money that you don’t anticipate needing for around 5 years. I would add at your age you are off to a great start.

itstoomuch
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Re: Why open a taxable account?

Post by itstoomuch » Thu Feb 22, 2018 5:53 pm

Our son did 3 years of No 401, IRA, Roth to accumulate enough funds for a down payment.
It holds alternative investments (non Indexes).
Emergency Funds.
He can no longer do Roth and taxable IRA may not be advantageous as a taxable account.
He is unmarried. No children.
We are retired and our deferred accounts are taxed at a much higher level than our original untaxed contribution and our taxable accounts.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

invst65
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Re: Why open a taxable account?

Post by invst65 » Thu Feb 22, 2018 5:58 pm

cam240 wrote:
Thu Feb 22, 2018 4:50 pm
Hello Community,

Today I am asking an open question for some arguments as to why open a taxable brokerage account? Both wife and myself contribute to our 401Ks and have 2 Roth accounts (one for each :) ) in which we also contribute to the max as well. I read a lot of folks here use their brokerage account to keep cash and invest (obviously). But we keep our cash (emergency fund) in our savings account. The benefits I see:
- Invest spare cash after maxing out Roth accounts and get a greater variety of investment choices than what is offer on our 401Ks.
- Money can be withdrawn at any time (which is why some folks used to stash their emergency fund I assumed)

P.S: My wife technically already has a brokerage (prior to us even knowing each other) and she has $0.1 balance in it haha. I researched and we could just turn in into a joint account (her account is also with the same company for our Roth and 401Ks so that is nice). So I mean I could add myself online in a heartbeat but I just want to understand that after contributing a high amount to both of our 401Ks (hopefully maxing them out on our first full year of full time employment), maxing out both Roth, what is left to do on the brokerage account?

After April there will be no Debt left to contribute towards or pay off.
MFJ (22%)
Age:21-22
If you keep doing as well as you obviously are you will probably understand when you get older. When you still have a lot of money left over after living expenses and maxing out your retirement accounts, you will have to put the rest of it somewhere.

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Artsdoctor
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Re: Why open a taxable account?

Post by Artsdoctor » Thu Feb 22, 2018 6:04 pm

financeidiot wrote:
Thu Feb 22, 2018 5:00 pm
In general, taxable accounts are for:
1. People who have already maxed out their tax advantaged space (401k, IRA, HSA, etc.) and want to invest more.
2. People who want to invest for shorter-term goals than retirement and avoid paying a penalty for early withdrawals.
3. People who want to be able to harvest tax losses for risky investments.
4. People who want to invest in something that they cannot through the use of a tax advantaged account. For example, your 401k may have limited or expensive investment options or you want to purchase a home. You can't live in a home purchased through your IRA.

There's more information on the pros/cons of investing in taxable accounts here:
https://www.bogleheads.org/wiki/Tax-eff ... e_accounts
Yes. All correct.

Two other significant reasons:

We can all agree that diversification is a good thing. When you have a taxable account, you're also increasing your "tax diversification." In retirement, one of your biggest tools is the ability to be flexible. Flexibility will also entail picking and choosing where you want to take your money from. Having a taxable account will add to your choices.

The other reason is charitable giving. You have far more opportunities to give philanthropically when you have a taxable account. If you have appreciated assets in your taxable account, you can transfer some of them to the charity of your choice (you won't pay the capital gains, and you may be able to deduct the entire amount on your taxes).

The item in #3 is a bit misleading. You don't have to have "risky investments" to tax-loss harvest. Something as simple as a total stock market fund will give you plenty of opportunities to tax-loss harvest at some point. Or, even bond funds can be used to tax-loss harvest. Having a perpetual loss of $3,000 on your 1040 during your working years can be very helpful.

JBTX
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Re: Why open a taxable account?

Post by JBTX » Thu Feb 22, 2018 6:11 pm

cam240 wrote:
Thu Feb 22, 2018 5:30 pm
JBTX wrote:
Thu Feb 22, 2018 5:19 pm
cam240 wrote:
Thu Feb 22, 2018 4:50 pm
Hello Community,

Today I am asking an open question for some arguments as to why open a taxable brokerage account? Both wife and myself contribute to our 401Ks and have 2 Roth accounts (one for each :) ) in which we also contribute to the max as well. I read a lot of folks here use their brokerage account to keep cash and invest (obviously). But we keep our cash (emergency fund) in our savings account. The benefits I see:
- Invest spare cash after maxing out Roth accounts and get a greater variety of investment choices than what is offer on our 401Ks.
- Money can be withdrawn at any time (which is why some folks used to stash their emergency fund I assumed)

P.S: My wife technically already has a brokerage (prior to us even knowing each other) and she has $0.1 balance in it haha. I researched and we could just turn in into a joint account (her account is also with the same company for our Roth and 401Ks so that is nice). So I mean I could add myself online in a heartbeat but I just want to understand that after contributing a high amount to both of our 401Ks (hopefully maxing them out on our first full year of full time employment), maxing out both Roth, what is left to do on the brokerage account?

After April there will be no Debt left to contribute towards or pay off.
MFJ (22%)
Age:21-22
Just so I understand, what do you see as an alternative?

Save the money in bank?
Just spend it because you think you are saving enough already?


I would say the benefits of having a taxable account are:

They provide you with additional available funds if you want to retire early
They are a way to acccumulate long term wealth but still have some level of liquidity for major purchases and expenses down the road
Saving for kids college, to the extent outside of 529s

You can either invest is some stocks and bonds if you plan not to touch it long term (at least 5-10 years ) or put it in something like ibonds or CDs as an extra cash reserve.
Definitely not the "spending it". You can never save enough. I guess yes keeping it in the savings account was my thought but a lot of the arguments make sense in favor of having one. Not so much for right now but for the future.
Another advantage to having taxable accounts is years down the road you may find you don’t have enough to fully fund your retirement and tax deferred accounts, possibly due to job loss, deciding for one parent to stay home with kids, major purchase like home or remodel, etc. In my 20s and 30s I funded taxable accounts after exhausting retirement opportunities. Over the years most of those funds have either been used to fund retirement accounts or used for major purchases, and at this point we only have about 6-8 months of taxable funds in ibonds,plus 5-6 months in bank accounts.

02nz
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Re: Why open a taxable account?

Post by 02nz » Fri Feb 23, 2018 12:41 am

triceratop wrote:
Thu Feb 22, 2018 4:58 pm
catdude wrote:
Thu Feb 22, 2018 4:56 pm
Generally you can't withdraw funds without penalties from 401k's and IRA's before age 59.5. If there's any chance you'll want to retire at say, age 55, a taxable account will come in really handy.
This is untrue; You can withdraw from these accounts prior to age 59.5 penalty-free by following IRS rule 72(t).
This a common misconception that I suspect causes many people to not contribute as much to their 401k's as they could. It was for me, until I found about all the exceptions. Here are some more ways to access your money before 59.5, in addition to the SEPP/72(t):
- If retiring at 55 or later, you can take penalty-free distributions from the 401k of the employer from which you're retiring.
- You can roll over a 401k into a traditional IRA, convert into Roth IRA by paying income taxes, and after five years the funds can be withdrawn penalty-free regardless of age.
- You can take a loan from your current 401k, with interest paid into the 401k account.
- For a Roth IRA you can withdraw the original contributions (not the earnings) at any time for any reason without penalty.
- And there are myriad other exceptions for IRAs (e.g. for first home purchase, medical expenses, etc.)

Yes a taxable account is more straightforward when it comes to getting money out, but it comes with its own headaches (accounting for basis, figuring out capital gains taxes). About 20% of my portfolio is in taxable, but I wish I'd maxed out my 401k every year.

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cfs
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Re: Why open a taxable account?

Post by cfs » Fri Feb 23, 2018 2:48 pm

The taxable account is very important on my side of the house, as a matter of facts it is our largest account. After maxing out our tax-advantaged accounts all our leftover dollars were thrown into the taxable account. Plus, a couple of years from now we will use that account to park what is left of our RMDs. My signature applies, y gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~

GoldenFinch
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Re: Why open a taxable account?

Post by GoldenFinch » Fri Feb 23, 2018 5:30 pm

cfs wrote:
Fri Feb 23, 2018 2:48 pm
The taxable account is very important on my side of the house, as a matter of facts it is our largest account. After maxing out our tax-advantaged accounts all our leftover dollars were thrown into the taxable account. Plus, a couple of years from now we will use that account to park what is left of our RMDs. My signature applies, y gracias por leer ~cfs~
The above writing sums it up. Taxable is where you throw the leftovers.
:sharebeer

NMBob
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Re: Why open a taxable account?

Post by NMBob » Fri Feb 23, 2018 7:18 pm

1- what are your other options?

Also, supporting other comment,s ira money withdrawal for a first time home owner...be advised the irs definition of 1st time home owner is roughly this ..give or take, simply someone who has not had a home they owned or had mortgage on in the past one year. so it is more like non past year home owner, not 1st time home owner.

I have all 3 accounts. the taxable account , among other stuff, I have next car purchase, vacation money in things making more than the savings account, ultra/ short bond funds, senior loan funds etc.... heck, you can get 3 months cds in a brokerage account a lot better than what savings account pays. See what your savings account pays in interest. For years Bank of America was only paying 1 tenth of 1 percent or less. actually i think it was 1 hundredeth. It was a total waste of time to have a savings account. They are coming up now.

acanthurus
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Kinkelly
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Re: Why open a taxable account?

Post by Kinkelly » Fri Feb 23, 2018 7:43 pm

I have maxed out my wife and I’s 401ks, Roth IRAs, HSAs and our daughters 529 for years. Then my parents died and left me an unexpected large amount of money and there is not enough room in tax deferred accounts to get it all in. So I started 2 brokerage accounts and invest in these and yearly I take money out for IRA contributions and HSA contributions. I won’t be able to get most of it in tax deferred accounts before I retire but it is a nice problem to have.

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Toons
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Re: Why open a taxable account?

Post by Toons » Fri Feb 23, 2018 7:50 pm

Why Open A Taxable Account.
3reasons.
To have more purchasing power for goods and services that I need and want.
To delay having to withdraw form Tax Sheltered Accounts.
To share with family while I am still here,and to pass on to them when i am not :mrgreen: :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

MrPotatoHead
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Re: Why open a taxable account?

Post by MrPotatoHead » Fri Feb 23, 2018 8:24 pm

What you have in taxable effectively remains under the government's radar. Not sure given the forum rules how else to say it other than if I was young I would not want to leave my chin hanging out and exposed. My own offspring developed the same sentiment on their own and while they pack Roth 401K and Roth IRA they also save and equal amount in taxable. I think I can say this, when the government needs money a large pile of money it has not previously taxed seems to merit their interest. Few people have much savings outside of retirement plans so that money is likely to draw less focus.

My point is,part the Boglehead way is to diversify to reduce risk. It seems prudent to do so in terms of savings and investment vehicles.

It is analogous to spousal selection, you are likely wise to seek a mate that is employed in a different industry and if possible,one to have a career that provides geographical flexibility.

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