Taxable vs tIRA

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Methos1979
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Taxable vs tIRA

Post by Methos1979 »

What is the benefit of having both a 'taxable' and IRA account? I have a 401k from work that I will roll over to my IRA at Fidelity very soon. I also have a Roth. When reading posts here people talk about their taxable accounts and holding mostly equities there and bonds in the tax-protected accounts. I pretty much just keep all my retirement funds in a few mutual funds that have performed well. When I retire soon I'll roll them over to the IRA and then do conversions as needed to the Roth but other than that just live my life. What/is there a benefit of having a taxable for a guy like me that is jus happy to live off the slow and steady growth of a few mutual funds?
Broken Man 1999
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Re: Taxable vs tIRA

Post by Broken Man 1999 »

Taxable accounts are useful when you have the ability to max out all your tax-deferred accounts and still have investable dollars available.

A taxable account assists one in tailoring their income, for reasons such as avoiding losing ACA subsidies, or perhaps to avoid ending up in a higher Medicare premium bracket.

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calmaniac
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Re: Taxable vs tIRA

Post by calmaniac »

Methos1979 wrote: Thu Oct 28, 2021 11:41 am What is the benefit of having both a 'taxable' and IRA account?
1. You may want to save more $ than will fit in tax deferred accounts

2. Having a taxable account provides diversity in regard to account types and taxation. Capital gains tax is only 15% for most, and is 0% for those with lower income. Check out tax gains harvesting.

3. If you leave a taxable account to heirs they inherit is tax free.

4. Lessen "RMD tax bomb" in retirement
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Topic Author
Methos1979
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Re: Taxable vs tIRA

Post by Methos1979 »

Excellent info! Thanks. Pretty much what I suspected. I just wanted to make sure I wasn't missing something else.
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grabiner
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Re: Taxable vs tIRA

Post by grabiner »

One other purpose for a taxable account is to save money for something which you cannot buy from a tax-advantaged account, such as a home down payment before you turn 59-1/2. (You can withdraw $10,000 penalty-free from an IRA for a home purchase, and Roth IRA contributions can always be withdrawn tax-free and penalty-free, but the rest of the money will have to from somewhere.)

But if you won't touch an account until retirement, then a deductible IRA, 401(k), or Roth IRA is almost always better than a taxable account. You will pay tax on 401(k) or IRA withdrawals, but this is offset by the deduction. If you are in a 22% bracket now and retire in the same 22% bracket, you can contribute $10,000 to a 401(k) for $7800 out of pocket. If it doubles in value, your $20,000 becomes $15,600 after tax, which is just as good as if you had invested $7800 tax-free, and better than if you invested it in a taxable account and paid tax on the gains.
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Alto Astral
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Re: Taxable vs tIRA

Post by Alto Astral »

Methos1979 wrote: Thu Oct 28, 2021 11:41 am When I retire soon, I'll roll them over to the IRA and then do conversions as needed to the Roth
I added the comma (after "soon") because that's the way I read this comment. You are retiring soon. If that's the case, taxable may not apply to you. However, imagine someone having 10+ years to retire. They maxed out 401k, Roth IRA, HSA and every tax sheltered account. Now what do they do with the extra dollars? Instead of leaving, say $500K, in a high yield savings account, they opt to invest in taxable.

Its pretty much what I did. I ran out of ways to invest in tax sheltered accounts and I did not want to buy a second home.
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GMCZ71
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Re: Taxable vs tIRA

Post by GMCZ71 »

Methos1979 wrote: Thu Oct 28, 2021 11:41 am What/is there a benefit of having a taxable for a guy like me that is jus happy to live off the slow and steady growth of a few mutual funds?
The other replies are right on the money. Just my random thoughts:
tax loss harvesting
money to pay tax Roth conversions
rebalancing
emergency
opportunity
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Re: Taxable vs tIRA

Post by Dude2 »

It is generally true that bonds don't belong in taxable. Bond distributions (where nearly all compensation comes from) are taxed at your income rate; whereas, gains on stocks are capped at some fixed percentage (or stock dividends are qualified, getting better tax treatment). Therefore, the larger the amount of bonds in your portfolio, the more it makes sense to invest in stocks in taxable and bonds in tax-deferred. The greater the portfolio, the more likely a person has run out of space for bonds altogether in their tax-deferred accounts.

Clearly the lower the yield (lower the bond distributions), the less this matters. Also, I'm told that a person's state of residence is also a big factor that cancels out this rule of thumb. Particular types of bonds in taxable may work better, i.e. Treasurys that are exempt from state tax or state-specific municipal bonds.

In general the answer may be: more money, more problems. If it doesn't make any sense to invest in taxable, clearly no reason to force yourself. However, the answer is largely driven by how much bonds you want, and, if you don't want much, then a wake up call might be to realize the risk you are taking on with a modest-sized portfolio of mostly all stocks going into retirement. To simply say that you own some mutual funds that have been doing well doesn't address risk or asset allocation at all.
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