When is a taxable account unnecessary?

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asif408
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When is a taxable account unnecessary?

Post by asif408 »

I am currently getting my investments organized. Since I don't make a huge salary, and I have $28,550 of tax advantaged space available through work and my personal accounts (which is more than 50% of my salary), it is unlikely I'll have money leftover to invest in a taxable account.

If a person cannot fill all their tax advantaged space, is there any reason to have or invest in a taxable account? I realize that investing in taxable has many additional complications and things to watch out for, so I figure if I can just invest using tax advantaged accounts and there is no additional benefit to having a taxable account I'll just do that. I just want to make sure I am not overlooking anything.

Thanks,
asif
ajcp
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Re: When is a taxable account unnecessary?

Post by ajcp »

No it's not needed, it's just that many on this board are able to max out their tax advantaged and still have more they want to invest.

The one advantage is that it can be withdrawn at any time with no penalties, so if you had a shorter term goal or wanted a secondary/backup emergency fund, that could be a use. Otherwise you can just stick with tax advantaged.
Mike Scott
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Re: When is a taxable account unnecessary?

Post by Mike Scott »

If you have a bank account earning interest you already have a taxable account. The advantage is liquidity or access to cash with no penalty. The question becomes how much? And is it also your emergency fund?
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Re: When is a taxable account unnecessary?

Post by The Wizard »

I only had a modest taxable investment account during my working years, due mainly to a large amount of tax-sheltered 403(b) space.
It does look like I may have a larger taxable account in retirement, due to wirhdrawals from that tax-sheltered nest egg, and especially RMDs.
But that will depend on how I do Roth conversions as well, since it's better to have a large Roth IRA balance than a large taxable balance...
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niceguy7376
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Re: When is a taxable account unnecessary?

Post by niceguy7376 »

We can use Roth IRA as emergency fund if it is established for more than 5 years and the initial contributions can be withdrawn penalty free. Thus, If I am not able to contribute the max to trad 401K (17500) and roth ira (5500) , I dont want to deal with taxable account too. I will have my EF fund and Roth will be backup EF.
sunnyd
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Re: When is a taxable account unnecessary?

Post by sunnyd »

Mike Scott wrote:If you have a bank account earning interest you already have a taxable account. The advantage is liquidity or access to cash with no penalty. The question becomes how much? And is it also your emergency fund?
This is exactly how I view a taxable account as well: a more efficient interest bearing bank account. It's basically any savings beyond your emergency fund although some people even invest their EFs. And unlike a 401k/IRA, your taxable doesn't have to be growth focused. You could have a conservative AA of 60/40 or even lower stock:bond ratio to preserve capital.
snowman
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Re: When is a taxable account unnecessary?

Post by snowman »

No, there is no need. However, you do need to have access to liquid funds in case of emergency. Many people on this board have higher savings rate than their available tax advantaged space, so taxable investing becomes necessity.

For our family of 2 self-employed individuals, the tax advantaged space has been over $100K+ for the past 10 years. Absolutely no way we could fill it up or even come close to it. On the other hand, we did not want to give up the deduction, so we have no taxable investments to speak of. As the accounts grew over time, and interest rates went down to 0%, our taxable cash emergency fund disappeared as well. Instead, we now consider HSA, Roth IRA, and HELOC as our 3 primary sources for emergency funding, should the need ever arise.
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Re: When is a taxable account unnecessary?

Post by rob »

I think taxable IS important even if not able to max tax deferred..... I want options in retirement and I cannot predict what the nut jobs making tax policy will do.... so I want to have some tax deferred, some roth and some taxable. Not to say you have to do it all at once... maybe the next decade is all tax deferred and next decade has some taxable investments for you... but I would think about ending up with some of each class of investment by retirement.
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barnaclebob
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Re: When is a taxable account unnecessary?

Post by barnaclebob »

If you aren't maxing out retirement accounts and don't have significant debt I would use a taxable investment account for long term savings goals (house down payment, kitchen remodel, etc) on top of an emergency fund or to hold money allocated for large predictable expenses such as replacing a roof or car. Once your taxable account becomes large enough then you don't really need a dedicated emergency fund sitting in a savings account earning 1% or worse.

So, if you have an emergency fund in a savings account, and don't have any long term savings goals or predictable expenses then you don't need a taxable investment account IMO.
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Re: When is a taxable account unnecessary?

Post by investor1 »

When is a taxable account unnecessary?
When you have unused tax advantaged space.
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Re: When is a taxable account unnecessary?

Post by FinancialDave »

I am speaking more from a retirement perspective - because hopefully that is the purpose of your investing plan.

In retirement it is helpful to have liquid funds that are not going to generate a huge amount of tax to use should you want to spend a larger sum of money. Two accounts that can accomplish this are first a Roth account of some type and secondly a properly managed taxable account. My first choice would be to max out your Roth allocation, which with your lower income should last you for a number of years. In later years if you run out of "tax deferred or tax-free space" then you could move to a taxable account.

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Re: When is a taxable account unnecessary?

Post by 22twain »

ajcp wrote:many on this board are able to max out their tax advantaged and still have more they want to invest.
And some people inherit money (or receive some other kind of windfall) that can't go directly into tax-advantaged accounts. If they're not already maxing out their tax-advantaged space, they can increase their tax-advantaged contributions from salary and make up the cash flow by withdrawing from the windfall. That's what I'm doing right now, but I'm close enough to retirement that I'll be able to "move" only part of the inheritance to tax-advantaged status. The extra taxable money will come in handy for paying taxes on Roth conversions before age 70.
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Re: When is a taxable account unnecessary?

Post by placeholder »

niceguy7376 wrote:We can use Roth IRA as emergency fund if it is established for more than 5 years and the initial contributions can be withdrawn penalty free.
Contributions can always be withdrawn interest and penalty free regardless of when the Roth was established or contributions made.
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Re: When is a taxable account unnecessary?

Post by cfs »

Taxable

Here is another idea for you, open the taxable and invest in tax free municipal bonds, national and from your state, this will (hopefully) make more money for you than your bank account, then at the beginning of each year you transfer all that is allowed to your IRAs without having to touch a penny from your bank savings accounts. Just another point of view.

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HurdyGurdy
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Re: When is a taxable account unnecessary?

Post by HurdyGurdy »

Hi Asif,
As I remember, you have both a 401k and a 457, in addition to your Roth IRA. You are right, there may be no need to keep a taxable account -- except for medium term goals, like a house payment, or savings for an early retirement.
mptfan
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Re: When is a taxable account unnecessary?

Post by mptfan »

asif408 wrote:If a person cannot fill all their tax advantaged space, is there any reason to have or invest in a taxable account?
No. You are not overlooking anything.
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Re: When is a taxable account unnecessary?

Post by Crushtheturtle »

Uh...yes.

If you want to save and grow money and have access to it before age 59.5 then obviously you need a taxable brokerage account.
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Re: When is a taxable account unnecessary?

Post by mptfan »

Crushtheturtle wrote:Uh...yes.

If you want to save and grow money and have access to it before age 59.5 then obviously you need a taxable brokerage account.
Ok, so to be more precise, the answer is no if you are referring to retirement savings, and if you plan to retire after the age of 59.
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runner9
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Re: When is a taxable account unnecessary?

Post by runner9 »

Parent is/was concerned that after maxing 401k (pretax) for 30 years and then getting social security and pension in retirement that RMDs, fully taxed, would put them into a higher tax bracket than investing some in taxable instead would have.

We max 2 roths and 1 457(b). After mortgage gets paid off we're planning to invest in taxable instead of a second 457(b).
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asif408
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Re: When is a taxable account unnecessary?

Post by asif408 »

Mike Scott wrote:If you have a bank account earning interest you already have a taxable account. The advantage is liquidity or access to cash with no penalty. The question becomes how much? And is it also your emergency fund?
Mike, I never thought about that. I do have an online savings account that is my emergency fund.
snowman wrote:No, there is no need. However, you do need to have access to liquid funds in case of emergency. Many people on this board have higher savings rate than their available tax advantaged space, so taxable investing becomes necessity.

For our family of 2 self-employed individuals, the tax advantaged space has been over $100K+ for the past 10 years. Absolutely no way we could fill it up or even come close to it. On the other hand, we did not want to give up the deduction, so we have no taxable investments to speak of. As the accounts grew over time, and interest rates went down to 0%, our taxable cash emergency fund disappeared as well. Instead, we now consider HSA, Roth IRA, and HELOC as our 3 primary sources for emergency funding, should the need ever arise.
Snowman, I also have a Roth IRA & HSA. I consider the HSA part of my medical emergency fund. I am currently using it for medical expenses, but if my balance starts getting large I plan to invest anything beyond 2 years OOP maximum for my health plan. The Roth is a second tier emergency fund for me, so if I ran out of money from my online savings account and the HSA I would access that money.
rob wrote:I think taxable IS important even if not able to max tax deferred..... I want options in retirement and I cannot predict what the nut jobs making tax policy will do.... so I want to have some tax deferred, some roth and some taxable. Not to say you have to do it all at once... maybe the next decade is all tax deferred and next decade has some taxable investments for you... but I would think about ending up with some of each class of investment by retirement.
Rob, thanks for your feedback, you've given me some good ideas to consider.
barnaclebob wrote:If you aren't maxing out retirement accounts and don't have significant debt I would use a taxable investment account for long term savings goals (house down payment, kitchen remodel, etc) on top of an emergency fund or to hold money allocated for large predictable expenses such as replacing a roof or car. Once your taxable account becomes large enough then you don't really need a dedicated emergency fund sitting in a savings account earning 1% or worse.

So, if you have an emergency fund in a savings account, and don't have any long term savings goals or predictable expenses then you don't need a taxable investment account IMO.
cfs wrote:Taxable

Here is another idea for you, open the taxable and invest in tax free municipal bonds, national and from your state, this will (hopefully) make more money for you than your bank account, then at the beginning of each year you transfer all that is allowed to your IRAs without having to touch a penny from your bank savings accounts. Just another point of view.

Thank you.
barnaclebob, I've considered that, just wasn't sure how I might invest the money. Right now I just have the online savings account that earns a little under 1% interest.

cfs, thanks for the idea. Since I am in the 15% marginal tax bracket, is there much advantage to a standard bond fund over a municipal bond fund?
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Re: When is a taxable account unnecessary?

Post by dh »

An interesting question and valuable responses to the original OP.
I can imagine a scenario where one would want to be certain that they are "using up" lower tax brackets (e.g., all of the 15% bracket) during lower earning years by not maxing out retirement accounts. Those taxed dollars could be put in a broad market index fund and would receive favorable cap gains treatment going forward. Then as a persons income increases, they could increase the amount of tax deferred retirement savings to remain in the lowest bracket possible (using the taxable index funds that if held for the long-term would only be taxed at 15%). Again, this may not be a situation for the OP or many others, but the idea of a person with an average/modest salary maxing out their 401 and IRA and not even using up the 15% bracket does not seem like a good strategy. I look forward to reading others views.
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Re: When is a taxable account unnecessary?

Post by Kevin M »

Crushtheturtle wrote:Uh...yes.

If you want to save and grow money and have access to it before age 59.5 then obviously you need a taxable brokerage account.
Not necessarily. You can take distributions from some 401k plans starting at age 55 if you separate from service at that age, and you can use Substantially Equal Periodic Payments (SEPP/72t) to take penalty-free distributions starting at any age--as long as you follow the rules.

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Re: When is a taxable account unnecessary?

Post by dewey »

What if your RMD's are greater than your spending needs? Wouldn't it make sense to house the left over in taxable?
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Re: When is a taxable account unnecessary?

Post by Sunny Sarkar »

mptfan wrote:
asif408 wrote:If a person cannot fill all their tax advantaged space, is there any reason to have or invest in a taxable account?
No. You are not overlooking anything.
How about emergency funds? It is regularly advised on this forum to stash 6 months or so worth of expenses in an emergency fund in a liquid taxable account that can be readily accessed when necessary (examples: money market with check writing).
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Re: When is a taxable account unnecessary?

Post by dewey »

What if your RMD's are greater than your spending needs? Wouldn't it make sense to house the left over in taxable?
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Re: When is a taxable account unnecessary?

Post by MichDad »

asif408 wrote:I figure if I can just invest using tax advantaged accounts and there is no additional benefit to having a taxable account I'll just do that. I just want to make sure I am not overlooking anything.
In addition to possible use as an emergency fund, you should use your taxable accounts to pay the taxes you'll accrue if or when you convert traditional IRAs and 401(k) assets to Roth IRAs and to Roth 401(k)s. Depending on your circumstances, you may require substantial taxable account assets to do this.

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Re: When is a taxable account unnecessary?

Post by abuss368 »

I have always found a taxable account important in terms of providing a lot more flexibility.
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Re: When is a taxable account unnecessary?

Post by Austintatious »

dewey wrote:What if your RMD's are greater than your spending needs? Wouldn't it make sense to house the left over in taxable?
or any other "left over" income that's not earned income
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Re: When is a taxable account unnecessary?

Post by archbish99 »

dh wrote:An interesting question and valuable responses to the original OP.
I can imagine a scenario where one would want to be certain that they are "using up" lower tax brackets (e.g., all of the 15% bracket) during lower earning years by not maxing out retirement accounts. Those taxed dollars could be put in a broad market index fund and would receive favorable cap gains treatment going forward. Then as a persons income increases, they could increase the amount of tax deferred retirement savings to remain in the lowest bracket possible (using the taxable index funds that if held for the long-term would only be taxed at 15%). Again, this may not be a situation for the OP or many others, but the idea of a person with an average/modest salary maxing out their 401 and IRA and not even using up the 15% bracket does not seem like a good strategy. I look forward to reading others views.
That's a great argument for making Roth contributions in the lower baskets; you're presuming that all IRA and 401k contributions are Traditional. I would argue that (for retirement saving) you never want money in taxable if you still have Roth space. While I have a mortgage and access to $55+k/year of tax-advantaged accounts, I don't ever expect to have taxable retirement savings. My parents, whose accounts I manage, have a taxable account due mostly to a lump-sum received after retirement.
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asif408
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Re: When is a taxable account unnecessary?

Post by asif408 »

Sunny Sarkar wrote:
mptfan wrote:
asif408 wrote:If a person cannot fill all their tax advantaged space, is there any reason to have or invest in a taxable account?
No. You are not overlooking anything.
How about emergency funds? It is regularly advised on this forum to stash 6 months or so worth of expenses in an emergency fund in a liquid taxable account that can be readily accessed when necessary (examples: money market with check writing).
Hi Sunny,

I should have stated in my original post that I do have an emergency fund. Here are the account I do have:

Savings accounts - contains my emergency fund (combination of online savings account and local credit union)
HSA - fully funding for 2014
Roth IRA - fully funded for 2014
457b plan - putting in $3000 this year
Taxable brokerage account - Currently have an investment in it from last year but plan to sell it this year and increase my 457b plan contribution

I had the brokerage account opened because my parents gifted me money last year that I wasn't sure what to do with, since I had filled my Roth IRA and didn't have access to the 457b plan at the time.
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Re: When is a taxable account unnecessary?

Post by mnvalue »

Does your 457b have a Roth option by any chance? What is your marginal tax rate? What are your prospects for a change in that marginal rate between now and retirement? (Salary growth above inflation may raise it, getting married may lower it, etc.) If you have tax-advantaged space left over, you may want to do this: Say your emergency fund is $10k. 1) Raise your 457b contributions over the next year by the pre-tax equivalent of $10k. 2) Use the emergency fund in savings to offset the reduction in income. 3) Move $10k in your Roth IRA from your retirement asset allocation into a short-term bond fund.

If you do that, as long as you don't need the emergency fund, it's just sitting there growing tax-deferred, and it has increased your Roth "space". For example, if your salary grows a bunch, or you get married and the household expenses don't go up as much as the income did, or you get an inheritance, etc., you might end up with more money than you can put into tax-advantaged accounts. But because you already did this back in 2014, you can use that money for an emergency fund in a savings account and move that $10k from the short-term bond fund in the Roth IRA into the retirement asset allocation. Now, if that extra cash flow never happens, you're not really worse off having done this.

If you have an emergency, you can always remove Roth IRA contributions (but not earnings) tax and penalty free at any time. I'm assuming you have contributed at least $10k to the Roth IRA; if not, just wait on this plan as necessary. Typically, I'm recommending that people contribute their emergency fund into a Roth IRA; in that case, even if they pull the money, they're no worse off than if they hadn't done this at all. In your case, since you're planning on contributing to a Roth IRA anyway, it's more complicated. An emergency would reduce your overall Roth space. If that's a concern, then maybe you don't do this, unless you have a Roth 457b option.
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