When to use a taxable brokerage account

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anthonypals
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When to use a taxable brokerage account

Post by anthonypals »

What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
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GerryL
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Re: When to use a taxable brokerage account

Post by GerryL »

anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When you want to invest more than you have room for in your retirement accounts. That is, long-term investing.
But people who have 401ks with poor investment choices, may choose to invest only enough in that account to get any employer match and then put the rest toward investment in a taxable account.

Others may use a taxable brokerage account for investing goals nearer term than retirement, but I just used mine for over-and-above savings.
sycamore
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Re: When to use a taxable brokerage account

Post by sycamore »

anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When the alternatives don't make sense :)

Some rules are thumb are described in the Prioritizing investments wiki article. As with many rules of thumb, there are certain assumptions about job, income, tax brackets, etc. that may not apply to everyone. Grain of salt and all that.

Various Bogleheads are discussing ways to improve that article in another thread. If you like, take a look at the current and proposed wiki articles to see if it answers your question. Feedback is welcome!
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anthonypals
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Re: When to use a taxable brokerage account

Post by anthonypals »

GerryL wrote: Thu Jul 15, 2021 8:25 pm
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When you want to invest more than you have room for in your retirement accounts. That is, long-term investing.
But people who have 401ks with poor investment choices, may choose to invest only enough in that account to get any employer match and then put the rest toward investment in a taxable account.

Others may use a taxable brokerage account for investing goals nearer term than retirement, but I just used mine for over-and-above savings.
That is what I was confused about, I have my IRA maxed out and I do the 401K up to the match, I wasn’t sure if I should leave money sitting in my savings account that I don’t use right now or if it would make more sense to put that in a taxable account for the near future.
nix4me
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Re: When to use a taxable brokerage account

Post by nix4me »

When you don’t want to be tax bombed in retirement come RMD time. Capital gains rates are favorable as well.
Tingting1013
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Re: When to use a taxable brokerage account

Post by Tingting1013 »

When you want to borrow at 1.1%
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GerryL
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Re: When to use a taxable brokerage account

Post by GerryL »

anthonypals wrote: Thu Jul 15, 2021 8:34 pm
GerryL wrote: Thu Jul 15, 2021 8:25 pm
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When you want to invest more than you have room for in your retirement accounts. That is, long-term investing.
But people who have 401ks with poor investment choices, may choose to invest only enough in that account to get any employer match and then put the rest toward investment in a taxable account.

Others may use a taxable brokerage account for investing goals nearer term than retirement, but I just used mine for over-and-above savings.
That is what I was confused about, I have my IRA maxed out and I do the 401K up to the match, I wasn’t sure if I should leave money sitting in my savings account that I don’t use right now or if it would make more sense to put that in a taxable account for the near future.
If you're going to need it in "the near future," you should not be investing that amount in the stock market. Whether sitting in a brokerage account is better than sitting in a savings account is the better option ...? Depends on what you put the $$$ into.
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anthonypals
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Re: When to use a taxable brokerage account

Post by anthonypals »

GerryL wrote: Thu Jul 15, 2021 9:39 pm
anthonypals wrote: Thu Jul 15, 2021 8:34 pm
GerryL wrote: Thu Jul 15, 2021 8:25 pm
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When you want to invest more than you have room for in your retirement accounts. That is, long-term investing.
But people who have 401ks with poor investment choices, may choose to invest only enough in that account to get any employer match and then put the rest toward investment in a taxable account.

Others may use a taxable brokerage account for investing goals nearer term than retirement, but I just used mine for over-and-above savings.
That is what I was confused about, I have my IRA maxed out and I do the 401K up to the match, I wasn’t sure if I should leave money sitting in my savings account that I don’t use right now or if it would make more sense to put that in a taxable account for the near future.
If you're going to need it in "the near future," you should not be investing that amount in the stock market. Whether sitting in a brokerage account is better than sitting in a savings account is the better option ...? Depends on what you put the $$$ into.
I was thinking about doing a 5 year brokerage investment where it is 80% bonds and 20% stocks so I’m not at huge risk to lose a lot in 5 years and hopefully make some interest.
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Re: When to use a taxable brokerage account

Post by jwfails »

Bonds are not recommended in a brokerage account. They are not as tax efficient.
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Re: When to use a taxable brokerage account

Post by coachd50 »

anthonypals wrote: Thu Jul 15, 2021 8:34 pm
GerryL wrote: Thu Jul 15, 2021 8:25 pm
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When you want to invest more than you have room for in your retirement accounts. That is, long-term investing.
But people who have 401ks with poor investment choices, may choose to invest only enough in that account to get any employer match and then put the rest toward investment in a taxable account.

Others may use a taxable brokerage account for investing goals nearer term than retirement, but I just used mine for over-and-above savings.
That is what I was confused about, I have my IRA maxed out and I do the 401K up to the match, I wasn’t sure if I should leave money sitting in my savings account that I don’t use right now or if it would make more sense to put that in a taxable account for the near future.
What exactly will be the use for the money? That is the question that needs to be answered.
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anthonypals
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Re: When to use a taxable brokerage account

Post by anthonypals »

coachd50 wrote: Thu Jul 15, 2021 10:11 pm
anthonypals wrote: Thu Jul 15, 2021 8:34 pm
GerryL wrote: Thu Jul 15, 2021 8:25 pm
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
When you want to invest more than you have room for in your retirement accounts. That is, long-term investing.
But people who have 401ks with poor investment choices, may choose to invest only enough in that account to get any employer match and then put the rest toward investment in a taxable account.

Others may use a taxable brokerage account for investing goals nearer term than retirement, but I just used mine for over-and-above savings.
That is what I was confused about, I have my IRA maxed out and I do the 401K up to the match, I wasn’t sure if I should leave money sitting in my savings account that I don’t use right now or if it would make more sense to put that in a taxable account for the near future.
What exactly will be the use for the money? That is the question that needs to be answered.
A 5-8 year plan for a down payment.
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PicassoSparks
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Re: When to use a taxable brokerage account

Post by PicassoSparks »

jwfails wrote: Thu Jul 15, 2021 10:07 pm Bonds are not recommended in a brokerage account. They are not as tax efficient.
At current interest rates, that’s largely irrelevant. Also tax efficiency is far from the most important question when it comes to deciding how to allocate money you are parking for ~5 years, which is what the OP is trying to decide.
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celia
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Re: When to use a taxable brokerage account

Post by celia »

When you want to save in an Emergency fund or for a short term goal, such as for a house down payment, getting married, a vacation or car.
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Re: When to use a taxable brokerage account

Post by NuBogleHead »

jwfails wrote: Thu Jul 15, 2021 10:07 pm Bonds are not recommended in a brokerage account. They are not as tax efficient.
What's a better alternative for similar risk?
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Re: When to use a taxable brokerage account

Post by coachd50 »

jwfails wrote: Thu Jul 15, 2021 10:07 pm Bonds are not recommended in a brokerage account. They are not as tax efficient.
I think that depends on reason for the investment.
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Re: When to use a taxable brokerage account

Post by Superleaf444 »

NuBogleHead wrote: Fri Jul 16, 2021 7:18 am
jwfails wrote: Thu Jul 15, 2021 10:07 pm Bonds are not recommended in a brokerage account. They are not as tax efficient.
What's a better alternative for similar risk?
I-bonds should get more love in regards to a down payment of a house IMO. Tax efficient and low risk
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anthonypals
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Re: When to use a taxable brokerage account

Post by anthonypals »

celia wrote: Fri Jul 16, 2021 6:52 am When you want to save in an Emergency fund or for a short term goal, such as for a house down payment, getting married, a vacation or car.
I have emergency fund, but still am 5-8 years from getting a house so I wasn't sure if it makes sense to just leave it in a savings not collecting much.
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Re: When to use a taxable brokerage account

Post by jwfails »

Tax drag always needs to be considered. In this this low interest rate environment we have been in one doesn't have many options. As others have suggested, I-bonds are an option, you mentioned holding for about 5 years so you could avoid the 3 month interest penalty. The current rate is 3.54 % for the first 6 months.
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Re: When to use a taxable brokerage account

Post by BabaWawa »

Now in retirement and withdrawing for expenses, I find it very tax efficient to have all options of a taxable account, tax deferred tIRA and a tax free Roth. Nice to take advantage of the first $80k (MFJ) or so for tax free qualified dividends or LTCG.
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Re: When to use a taxable brokerage account

Post by anthonypals »

BabaWawa wrote: Fri Jul 16, 2021 8:50 am Now in retirement and withdrawing for expenses, I find it very tax efficient to have all options of a taxable account, tax deferred tIRA and a tax free Roth. Nice to take advantage of the first $80k (MFJ) or so for tax free qualified dividends or LTCG.
So you used the taxable account as a long term retirement account as well?
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Re: When to use a taxable brokerage account

Post by 02nz »

anthonypals wrote: Fri Jul 16, 2021 10:14 am
BabaWawa wrote: Fri Jul 16, 2021 8:50 am Now in retirement and withdrawing for expenses, I find it very tax efficient to have all options of a taxable account, tax deferred tIRA and a tax free Roth. Nice to take advantage of the first $80k (MFJ) or so for tax free qualified dividends or LTCG.
So you used the taxable account as a long term retirement account as well?
Lots of people do this, but generally it's only advisable if you've already maxed out tax-advantaged space.
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Re: When to use a taxable brokerage account

Post by 02nz »

anthonypals wrote: Fri Jul 16, 2021 7:30 am
celia wrote: Fri Jul 16, 2021 6:52 am When you want to save in an Emergency fund or for a short term goal, such as for a house down payment, getting married, a vacation or car.
I have emergency fund, but still am 5-8 years from getting a house so I wasn't sure if it makes sense to just leave it in a savings not collecting much.
I bonds seem perfect for this. The interest rate will vary with inflation, but currently at 3.54%.
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Re: When to use a taxable brokerage account

Post by ruralavalon »

anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
In general after an emergency fund is funded, after the paying off high interest debt, after making maximum contributions to all available tax-advantaged accounts (unless the 401k fund choices are terrible).
Wiki article Prioritizing Investments.
A 5-8 year plan for a down payment.
Use a taxable account invested in a very safe short-term bond fund with a good credit rating, federally insured short-term or intermediate-term CDs, federally insured savings account, I savings bonds, or a combination of those choices.
Last edited by ruralavalon on Fri Jul 16, 2021 11:31 am, edited 3 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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anthonypals
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Re: When to use a taxable brokerage account

Post by anthonypals »

ruralavalon wrote: Fri Jul 16, 2021 11:24 am
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
After an emergency fund is funded, after the paying off high interest debt, after making maximum contributions to all available tax-advantaged accounts (unless the 401k fund choices are terrible).
Wiki article Prioritizing Investments.
My only question about going down this path, is if you want to save for a house but are contributing so much to roth 401k/IRA wont it take forever to accomplish the house goal? That is why was thinking about putting some in a taxable for the next few years instead of maxing out retirement and not having any extra left.
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Re: When to use a taxable brokerage account

Post by ruralavalon »

anthonypals wrote: Fri Jul 16, 2021 11:29 am
ruralavalon wrote: Fri Jul 16, 2021 11:24 am
anthonypals wrote: Thu Jul 15, 2021 8:15 pm What are the general rule of thumbs for when it would make sense to use a brokerage investment account?
After an emergency fund is funded, after the paying off high interest debt, after making maximum contributions to all available tax-advantaged accounts (unless the 401k fund choices are terrible).
Wiki article Prioritizing Investments.
My only question about going down this path, is if you want to save for a house but are contributing so much to roth 401k/IRA wont it take forever to accomplish the house goal? That is why was thinking about putting some in a taxable for the next few years instead of maxing out retirement and not having any extra left.
For buying a home in 5-8 years use a taxable account invested in a very safe short-term bond fund with a good credit rating, federally insured short-term or intermediate-term CDs, federally insured savings account, I savings bonds, or a combination of those choices.

Even when saving for a home I still suggest that be (1) after funding an emergency fund, (2) after paying off high interest debt, and (3) after contributing enough to the employer plan to get the full employer match.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: When to use a taxable brokerage account

Post by BabaWawa »

anthonypals wrote: Fri Jul 16, 2021 10:14 am
BabaWawa wrote: Fri Jul 16, 2021 8:50 am Now in retirement and withdrawing for expenses, I find it very tax efficient to have all options of a taxable account, tax deferred tIRA and a tax free Roth. Nice to take advantage of the first $80k (MFJ) or so for tax free qualified dividends or LTCG.
So you used the taxable account as a long term retirement account as well?
Yes. My tax advantaged and taxable accounts all had long term goals to provide for my retirement.
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celia
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Re: When to use a taxable brokerage account

Post by celia »

02nz wrote: Fri Jul 16, 2021 11:06 am
anthonypals wrote: Fri Jul 16, 2021 10:14 am
BabaWawa wrote: Fri Jul 16, 2021 8:50 am Now in retirement and withdrawing for expenses, I find it very tax efficient to have all options of a taxable account, tax deferred tIRA and a tax free Roth. Nice to take advantage of the first $80k (MFJ) or so for tax free qualified dividends or LTCG.
So you used the taxable account as a long term retirement account as well?
Lots of people do this, but generally it's only advisable if you've already maxed out tax-advantaged space.
If you are in early retirement and have over $500K (single) or $1M (MFJ) in tax-deferred, I hope you are withdrawing from tax-deferred for living expenses or conversions before spending down much in taxable.

I know it’s nice to have a choice of where to withdraw from in retirement, but you need to also plan for when you don’t have much choice (ie, RMDs at Age 72).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: When to use a taxable brokerage account

Post by 02nz »

celia wrote: Sat Jul 17, 2021 2:43 pm
02nz wrote: Fri Jul 16, 2021 11:06 am
anthonypals wrote: Fri Jul 16, 2021 10:14 am
BabaWawa wrote: Fri Jul 16, 2021 8:50 am Now in retirement and withdrawing for expenses, I find it very tax efficient to have all options of a taxable account, tax deferred tIRA and a tax free Roth. Nice to take advantage of the first $80k (MFJ) or so for tax free qualified dividends or LTCG.
So you used the taxable account as a long term retirement account as well?
Lots of people do this, but generally it's only advisable if you've already maxed out tax-advantaged space.
If you are in early retirement and have over $500K (single) or $1M (MFJ) in tax-deferred, I hope you are withdrawing from tax-deferred for living expenses or conversions before spending down much in taxable.
It depends on the circumstances, I don't think your statement is anywhere near generally true. I would say $500K single/ $1M MFJ in tax-deferred is a perfectly fine amount to have at the start of normal retirement age (65-70), not at the start of early retirement, when I'd want substantially more in tax-deferred. How much more depends of course on time frame, spending, pension/no pension, etc. It's good to strategically draw down tax-deferred when it's advantageous to do so from a tax standpoint, but there's far too much FUD (fear, uncertainty, and doubt) out there over RMDs (which come to $39K for a $1M portfolio at age 72) and "tax bombs."
Last edited by 02nz on Sat Jul 17, 2021 3:12 pm, edited 3 times in total.
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Re: When to use a taxable brokerage account

Post by pasadena »

If you're ok with having to potentially delay your home purchase, then I'm in the camp of investing that money. Your 20/80 AA sounds ok to me (I did that several years ago, but I used a more aggressive AA).

What would be the impact of that plan if you were to max out your 401(k)?
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celia
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Re: When to use a taxable brokerage account

Post by celia »

02nz wrote: Sat Jul 17, 2021 3:04 pm
celia wrote: Sat Jul 17, 2021 2:43 pm If you are in early retirement and have over $500K (single) or $1M (MFJ) in tax-deferred, I hope you are withdrawing from tax-deferred for living expenses or conversions before spending down much in taxable.
It depends on the circumstances, I don't think your statement is anywhere near generally true. I would say $500K single/ $1M MFJ in tax-deferred is a perfectly fine amount to have at the start of normal retirement age (65-70), not at the start of early retirement, when I'd want substantially more in tax-deferred. How much more depends of course on time frame, spending, pension/no pension, etc. It's good to strategically draw down tax-deferred when it's advantageous to do so from a tax standpoint, but there's far too much FUD (fear, uncertainty, and doubt) out there over RMDs (which come to $39K for a $1M portfolio at age 72) and "tax bombs."
We actually agree. (I meant to say “in early retirement years, and have…”.) Those are the general amounts where I notice that someone needs to start worrying about large RMDs. And the younger they are with that amount of money, the more time that money has to compound.

To make this relevant to the OP, it is best to start retirement with a lot in a taxable account, since taxes will need to be paid on the withdrawals/ conversions from tax-deferred. If you are under 59.5 when withdrawing, there will be early withdrawal penalties on anything withheld for taxes.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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