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Finally, your financial outlook and choices match your goals. You are determined to continue to create financial stability and build personal wealth. You are maxing out your match on your employer sponsored retirement account. You have opened an IRA, Roth, or both and have started monthly contributions. You have your savings accounts looking great with 6-12 months’ worth of income in your emergency and secondary saving accounts for whatever else in the future you may need or want – home down payment, vacations, new car, etc.

Investing has historically been the best way to build wealth. With 7% -10% annual gains, investments like stocks, bonds, and mutual funds most likely will outpace traditional savings accounts and even High Yield savings accounts in the long run.[1]  As you take the following steps to build wealth, it might be time to get a Taxable Brokerage Account, sometimes called a Brokerage Account or a Non-Qualified Individual Account.[2] This type of account can be owned by an individual – an individual taxable brokerage account or a group- a joint taxable brokerage account.

Taxable Brokerage Account

Pros:

  • It has a large variety of investment options. If it is offered, you can invest in it. [3]
  • Eligibility to start one only requires that you be 18 years old.2
  • No limits on the amount you can contribute.2
  • It is Liquid. Though it might take a bit of time to sell an investment, it is relatively easy to turn your investments into cash.[4]
  • There are no Required Minimum Distributions (RDMs). Meaning unlike retirement accounts like 401ks and IRAs, you don’t need to pull any money from this account no matter what age you reach.4
  • There are no rules on withdrawals by heirs. There are rules on inherited retirement accounts for the recipient to empty the account within ten years, sometimes creating tax burdens for that heir.4
  • The possibility that your gains will outperform traditional savings accounts and High Yield Savings accounts.1
  • There can be low fees, but you must do your research because they vary from institution to institution.

Cons:

  • This is an investment account, and there is a possibility that you lose part or all of the money contributed. Therefore, most financial advisors and experts don’t recommend you put your emergency fund in an investment account but an FDIC-insured savings account. 1
  • These accounts are called taxable for a reason. You pay taxes on the money before you contribute it and if you remove it from the account. With a Taxable Brokerage Account, there is no tax sheltering or tax-free growth offered by retirement accounts.4
  • If you sell stocks, mutual funds, or other capital assets held in your brokerage account that are kept for at least one year, any gain from the sale is taxed at either a 0%, 15%, or 20% rate. In addition, depending on your modified adjusted gross income, you may also have to pay a surtax on net investment income -NII includes, among other things, taxable interest, dividends, gains, passive rents, annuities, and royalties.[5]
  • As with all investments, the safest way is with a long-term approach that has your risk tolerance and a diversification strategy at the forefront. People can get in trouble with these accounts when they try to time the market, don’t spend time researching an investment and make trendy investment choices based on impulse.1

If you feel like a taxable brokerage account might add to your overall financial growth and goals, they are a great way to increase your investment portfolio. Remember, with all investment- time, contributions, return on investment, and fee/taxes- are essential to understand before opening an account. If you want to explore investment accounts that would work for your personal goals, Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.

Sources:

[1] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf

[2] https://www.nerdwallet.com/article/investing/types-investment-accounts-know

[3] https://www.personalfinanceclub.com/the-pros-and-cons-of-a-brokerage-account/

[4] https://www.forbes.com/advisor/investing/taxable-investment-accounts/

[5] https://www.kiplinger.com/taxes/capital-gains-tax/603735/2022-capital-gains-tax-rate-thresholds

Advisory services offered through Capital Asset Advisory Services, LLC, a Registered Investment Advisor. This material has been prepared for informational purposes.