Taxable Brokerage Accounts for Retirement

March 5th, 2008  |  Published in Retirement  |  Comments Off on Taxable Brokerage Accounts for Retirement

There are a lot of retirement options out there, so many that your head probably spins whenever someone talks about 401(k)’s, 403(b)’s, Roth IRAs, or Traditional IRAs… the list goes on. One topic that most people don’t talk about is saving part of your nest egg in a regular taxable brokerage or mutual fund account. They don’t talk about it because you get immediate tax benefits for contributing to a 401(k) (you can deduct your contributions from your income) and because you get deferred tax benefits for Roth IRAs (your distributions are tax free in retirement), but a regular taxable brokerage account should be a part of your retirement planning for X key reasons.

Tax Diversification

You shouldn’t put all of your eggs in one basket and that basket shouldn’t say “tax deferred.” 401(k)’s give you immediate tax benefits in return for taxing your disbursements. It’s nice because you pay less taxes now in return for paying more taxes, on a larger asset base, in the future. The only risk you have is in whether your tax rate increases substantially. If you are saving on 25% in taxes today but forced to pay 50% in taxes in 40 years, it’s less clear how good of a decision you’ve made. This is why it’s important to diversify your retirement account tax exposure. You can do this by going with a Roth IRA or, if you’ve exhausted that route, opening up a taxable brokerage account.

Flexibility & Access to Funds

When you contribute to a 401(k), the only way to get the funds is either borrowing against the 401(k) or withdrawing from the 401(k) and taking a 10% penalty (on top of the taxes). With a taxable brokerage account, you have the flexibility to access the funds whenever you need it! Give yourself the flexibility to access your funds, or at least part of your funds, and you won’t have to cripple your retirement by borrowing or withdrawing from a 401(k).

Tax Benefits

When you invest with a 401(k), everything is taxed at the short term capital gains rate when you begin taking disbursements in retirement. With a brokerage account, you can take advantage of the long term capital gains tax rate if you hold the investment for longer than a year. In a 401(k), everything that comes out of the account is taxed at your tax rate, regardless of how long you’ve held the underlying asset! Does the benefit of an immediate tax break outweigh the fact that all of your appreciation is taxed at the short term rate? That is for you to decide.

I’m not advocating that you select a 401(k) or a taxable brokerage account, I’m merely suggesting that a taxable brokerage account has value in a retirement plan. All three accounts (401k, Roth IRA, and taxable brokerage account) have their place in a solid retirement plan.

10 Rules: Defer Taxes

December 27th, 2006  |  Published in Retirement  |  Comments Off on 10 Rules: Defer Taxes

This final tip in Forbes’ ten rules for building wealth starts dabbling in tax implications and how income and capital gains taxes will affect you investment decisions. The two tips they gives:

  1. Be aware of whether your sale will be a short term or long term capital gain. A short term capital gain will be taxed at your income tax bracket whereas a long term capital gain will be taxed at a mere 15% – regardless of your income tax bracket.
  2. Sell losers before the end of the year and they can offset winners. “…It can be a good move to sell losers in your portfolio to take advantage of the annual $3,000 capital-loss deduction limit and offset any capital gains on your winning picks.”

Source: Fortune

Roth IRA Contribution Limits and Income Phaseout Schedule

September 28th, 2006  |  Published in Investing  |  8 Comments

The Roth IRA contribution limits are:

Year49 And Under50 And Over
2005$4,000$4,500
2006-7$4,000$5,000
2008$5,000$6,000

As you can see, if you’re over 50 then you’re given a “catch-up” contribution.

The income phaseout schedule is based on your modified adjusted gross income, which is your income minus some deductions. The income phaseout schedule is:

Filing StatusIncome FloorIncome Ceiling
Single, Head of Household$95,000$110,000
Married Filing Separately$0$10,000
Married Filing Jointly$150,000$160,000

The phaseout is linear, so if you are single then at $95,000 then you could contribute $4,000 in 2006. If you made $110,000 then your contribution is $0. If you made $100,000, then your contribution would be limited to $1333.33.

One little known fact: If you’re under the income ceiling, your phaseout’s minimum contribution is $200. So, if your MAGI were $109,999, your contribution limit is $200, not some miniscule proportionate number.