Learning About Household Budgets

Four Reasons You Need a Taxable Investment Account

When it comes to investing, tax-deferred accounts--such as 401(K)s and traditional individual retirement accounts (IRAs)--are popular with investors due to the fact that they permit contributions to grow tax-free. However, a taxable investment account is one product that nearly every investor can benefit from opening. Even though contributions are made with after-tax dollars and you also have to pay taxes on your earnings, the tax rate is considered favorable by investment specialists. Read on to learn some of the benefits of taxable investment accounts and why you need one in your portfolio.

1. You Can Use the Money for Anything

One of the downsides of tax-deferred accounts is that many of them limit the use of your money. For example, 529 plans may only be used for college savings, while 401(K)s are limited to saving for your retirement. If you have to use your money for another purpose, you will have to pay a fee.

With a taxable investment account, you can literally use the money for anything, be it a dream vacation, home repairs, early retirement, or for an unexpected emergency. If you feel like you should save more money but aren't sure what you want to use the money for, a taxable investment account is a terrific place to stow your extra funds. 

2. There Are No Restrictions Concerning Your Contributions

Another benefit of a taxable investment account is that there are no rules concerning your contributions. There is no need to worry about making sure you do not exceed an annual or lifetime contribution limit; you can put in as little or as much money as you want.

Taxable investment accounts are also useful for those with high incomes, as there are no income limitations. If you are a high earner who makes too much money to use conventional tax-deferred investment accounts (such as an IRA), a taxable account is an excellent alternative.

3. You Have a Plethora of Investment Options

Within your taxable investment account, you have an assortment of funds that you can invest your money in. You can choose between relatively safe funds (such as government bonds) or opt for riskier holdings (such as small cap stocks or international funds) to maximize your potential return. This ensures that the money in your taxable account is invested appropriately for your preferences and your financial goals. 

4. Taxable Accounts Do Not Require Minimum Distributions

A downside to some tax-deferred accounts, such as the traditional IRA or 401(K), is that the require the account owner to take required minimum distributions beginning at 70.5 years of age. Taxable investment accounts do not have required minimum distributions. Your money is free to grow until you actually need it.

‚ÄčTalk to an accountant or personal financial professional who offers investment services to learn more about how taxable investment accounts will be beneficial to your financial situation.