Be sure to choose your account type carefully.
- Dave Ramsey recommends taxable brokerage accounts under certain circumstances.
- He pointed out several advantages of these accounts.
- Benefits include increased flexibility.
When you decide to invest money, you will have to choose between putting it into a tax-advantaged retirement account and a taxable brokerage account.
Retirement accounts can be a great choice because they allow you to save for your future while receiving tax relief, either in the year you make contributions or when you withdraw money. Taxable brokerage accounts do not offer this benefit, but they can still be a good option in certain circumstances.
So when should you use a taxable brokerage account and what benefits do they offer? Financial expert Dave Ramsey explained three key benefits of investing in just one.
1. You have more flexibility with a taxable brokerage account
As the Ramsey Solutions blog explains, flexibility is one of the biggest benefits of using a taxable account to invest in.
“You can withdraw money from a brokerage account at any time and for any reason – just like you would from a regular bank account – without paying any early withdrawal penalty,” according to Ramsey.
This is not the case when you have a tax-advantaged retirement account. “You should wait until age 59½ to withdraw money from a 401(k) or IRA without penalty,” says Ramsey.
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This benefit does not outweigh the tax benefits if you are saving for retirement anyway. That’s why Ramsey strongly recommends maximizing your retirement accounts first. But, if you’re putting money aside for early retirement or that you might need before you hit age 59½, a taxable account is a better bet.
2. There is no contribution limit when investing in a taxable brokerage account
Another huge advantage of taxable brokerage accounts is that you are allowed to put as much money into them as you want. And, again, you can’t do that when you’re putting money into a tax-advantaged retirement plan.
If you want to invest beyond the annual limits of 401(k) or IRA plans, a taxable brokerage account will likely be one of your only options for doing so. And if you have extra money to put aside, you definitely want to invest it rather than being limited by a government cap on how much you can contribute to your account.
As Ramsey explains, the reason for this is that you invest in the account with after-tax dollars and get no other special tax advantages with a standard brokerage account.
“You’ve already paid taxes on the money (on your salary), so the government doesn’t care how much you invest. And on top of that, the government will hit you with capital gains taxes later on, so they’ll get their taxes anyway,” says Ramsey’s blog.
3. There is no income limit on who can contribute to a taxable brokerage account
Finally, the last big advantage of using a taxable brokerage account for investing is that your income does not affect your ability to contribute. Some types of tax-advantaged accounts, such as traditional and Roth IRAs, have income limits. If you make a lot of money, this could be a big advantage of standard brokerage accounts.
For all these reasons, it is worth considering opening this type of account. While Ramsey says you should claim tax breaks first, he clarifies that he thinks investing in a taxable brokerage account is an especially ideal choice if you’re planning for early retirement or saving for other goals. long-term finance.
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