Updated: May 23, 2023

Lastly,Taxable Brokerage Accounts

A taxable brokerage account has its own advantages when it comes to financing your retirement.
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Taxable Brokerage Accounts

A taxable brokerage account is very different than either of the IRA accounts, though you can select your Roth IRA to be classified as a standard taxable brokerage account.

A taxable brokerage account offers much more flexibility, with features including no income or contribution limitations, penalty-free withdrawals, and an unlimited selection of investment choices.

However, any interest generated, dividends collected, and capital gains made through that account will be taxed by the IRS, which is why opening a taxable brokerage account is sometimes a less popular option.

Those who are financially well-off looking for a retirement account with more flexibility may want to consider getting a taxable brokerage account, as Roth IRAs limit individuals who make over $107,000 a year, whereas taxable brokerage accounts don't.

The tradeoff, however, is that individuals with this type of account may have their investment returns significantly lowered through being taxed.

Additionally, one negative or positive aspect, based on the way you view it, is that individuals are not required to begin taking mandatory distributions at the age of 70 1/2, and are given much more freedom when it comes to how their funds are handled. However, depending on your financial profile and personality type, you may want to ensure that you get consistent distributions through your retirement if you're nervous about outliving your funds.

For those who are on the fence about whether the tax makes this plan worth having, there are ways you can minimize the taxes owed on the funds in your taxable brokerage account.

One suggestion is to hold your individual stocks for over a year, which gives you the advantage of paying the low, long-term capital gains tax of 15% as opposed to the significantly higher short-term capital gains tax rate.

Another suggestion is to invest in index funds for your account, which are taxed at a lower rate than short-term realized gains.

When it comes down to it, the retirement account you choose should fit your needs and preferences, and if you're concerned about being consistently taxed on your contributions, you may want to choose one of the traditional retirement account options.