When You Should Use a Taxable Brokerage Account (2024 Guide)

There are no income requirements related to opening a taxable brokerage account. Also, while some brokerages have minimum deposit requirements, plenty have no minimums. All you need to get started is enough cash to buy your first investment.

You can deposit as much as you want to your brokerage account, and you can make your deposits at any time. If you have a lot of extra cash, that makes it easy to invest as much of it as you’d like as quickly as you’d like.

Typically, 401(k)s only offer a small selection of mutual funds. With a brokerage account, you can invest in anything: stocks, bonds, options, ETFs, futures, precious metals, commodities, forex, and more are all fair game for you. If you’re a sophisticated investor or want to play around with some nontraditional securities, a brokerage account lets you do that.

Before investing in exotic instruments, take the time to educate yourself. This ExpertInvestor.net list of the top forex trading books is a good start for budding forex investors, for example.

Possibly the most crucial benefit of taxable brokerage accounts is that you can make a withdrawal whenever you like. All you have to do is sell enough investments to cover the amount you want to withdraw, then ask your brokerage company to send the funds to your checking account.

You will have to pay capital gains taxes if your investments gain value, but there are no withdrawal penalties to worry about.

Taxable brokerage accounts don’t have required distributions. That means you can keep your money invested long past the time you turn 70 ½. That makes it easier to plan your taxes and leave your investments to grow for future generations.

Taxable brokerage accounts are the right choice for several investing goals and situations.

Taxable brokerage accounts are ideal if you want to save for something but need to access the money before you reach retirement age. Whether you’re saving for a down payment on a house or funding a wedding, taxable brokerage accounts offer the growth and flexibility to help you reach your goal.

If you max out your 401(k) and IRA, you don’t have to stop saving. It just means you can’t contribute more money to those accounts. Taxable brokerage accounts have no contribution limits. You can use them to hold whatever extra cash you have that won’t fit within your retirement account contribution limits.

Everyone’s financial situation is different. You might want to keep some or all of your savings flexible in case you need to access it on short notice. You might want to retire early or have money available to help take care of a loved one in need. Penalty-free withdrawals provide the flexibility to make these things easy.

Putting your money in a taxable account doesn’t mean you can’t take steps to reduce your tax bill. Following the right investing plan will reduce the amount you owe when you make withdrawals from your taxable brokerage account.

The IRS treats investments differently based on how long you hold the investment. The important cutoff date to remember is one year.

Any investments you sell within one year of buying are treated as short-term investments. You pay your regular income tax rate on any short-term capital gains you make from them.

If you hold an investment for at least one year before you sell it, you only have to pay the long-term capital gains rate.

2024 long-term capital gains tax rates :

You’ll also pay the long-term capital gains tax rate on any qualified dividends you receive. These are dividends paid by U.S. or qualifying foreign companies on shares that you’ve held for a sufficient period of time before the ex-dividend date.

In other words, dividends are also taxed at a lower rate if you hold the dividend-paying investment for the long term, providing even more incentive to buy and hold.

If you invest in mutual funds, you’ll have to pay taxes based on the actions the fund managers take on your behalf. If the fund realizes capital gains, you will pay those taxes. The cost can add up quickly if you’ve invested in an actively managed fund that makes lots of transactions.

Index funds are more hands-off investments. They seek to emulate a specific stock index rather than outperform the market. That means managers make far fewer transactions, which in turn means investors realize fewer capital gains. The gains they realize are typically long-term, so the IRS taxes them at a lower rate than short-term gains.

You’ll still pay taxes when you sell your shares, but reducing the taxes you pay while your money is in the fund can increase your investments’ growth.

It’s possible to take advantage of certain tax benefits even if you hold the tax-advantaged investments in a taxable account.

Municipal bonds are bonds offered by local governments. They’re usually used to fund specific projects like improving a school or roadway. The interest you earn from municipal bonds is exempt from federal taxes. Most states also exempt you from taxes if the bond is from a city or town in the same state.

Federal savings bonds also offer some tax incentives. For example, bond interest is only taxable at the federal level; they’re exempt from state and local taxes.

You can even avoid the federal taxes on savings bonds if you use the proceeds to pay for qualified educational expenses, making them completely tax-free investments. For singles and heads of household, this tax incentive is only available if your Modified Gross Annual Income is less than $82,350.

After that amount, the tax incentive starts to phase out until you make $97,350 each year, at which point the incentive ends. If you’re married, the phaseout starts at $123,550 and you can no longer receive the incentive if you make more than $153,550.

If you are married filing separately, you’re not eligible for this tax incentive.

Retirement accounts are fantastic for their intended goal: saving for retirement. But they’re not the be-all and end-all when it comes to investing. Taxable brokerage accounts are the right tool to use if you need more flexibility or have financial goals you want to reach before you retire.