There’s a reason IRAs and 401(k)s are popular choices for building retirement savings. Retirement accounts like these give you a tax break on your contributions. They also allow your money to grow tax deferred so you don’t have to pay capital gains taxes year after year.
But there’s a problem with traditional IRAs and 401(k)s. If you use your savings before you turn 59½, you risk a 10% penalty on any sum you withdraw.
Will AI create the world’s first billionaire? Our team just published a report on a little-known company called “Indispensable Monopoly” that provides critical technology that both Nvidia and Intel need. Continue “
Now you may think, “Well, okay, then. I’ll wait until I’m 59 and a half and commit to not touching my savings beforehand.”
Unfortunately, life could get in the way of that plan.
If you are laid off at age 57 and can’t find another full-time job, your IRA may be banned for another two years. If health problems force you to stop working at age 54, you may need to start tapping into your retirement savings much sooner than expected. Then clearly you need a backup plan.
With a taxable brokerage account, your money will not be tax-free and you will have to pay capital gains taxes each year. The plus side is that you have the flexibility to tap into your savings at any time.
Of course, if you’re forced to retire much earlier than planned, you may need to find a way to work part-time or freelance if you don’t have enough savings to survive those extra years. But where a taxable brokerage account really comes in handy is when you have a lot of money saved and can afford to start raiding your savings well before age 59½.
If you’re 52 and your savings hit the $4 million mark, for example, you might feel comfortable retiring. And if your industry is changing in a negative way and your work is no longer rewarding, that’s an option you may want to exercise.
If you have a large portion of your savings in a taxable brokerage account, you have more options. Therefore, it is worth using one of these accounts to house some of your savings, even if there is no special tax treatment for that money.
You may be worried about annual capital gains tax bills if you keep some of your long-term savings in a taxable brokerage account. But know that you have options.
You may be able to help offset those gains through strategic tax deductions. There is also tax-loss harvesting, where assets are intentionally sold at a loss to help offset gains. Working with a tax professional could help you get the most out of a regular brokerage account when using it as part of your retirement savings strategy.