Make sure you choose your account type wisely.
- Dave Ramsey recommends taxable brokerage accounts in some circumstances.
- He’s pointed out several advantages these accounts have.
- The benefits include increased flexibility.
When you decide to invest money, you’re going to 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 getting a tax break either in the year you make contributions or when you withdraw money. Taxable brokerage accounts do not provide this benefit, but they can still be a good option under certain circumstances.
So, when should you use a taxable brokerage account and what advantages do they provide? Finance expert Dave Ramsey explained three key benefits of investing in one.
1. You have more flexibility with a taxable brokerage account
As the Ramsey Solutions blog explains, flexibility is one of the biggest perks of using a taxable account to invest in.
“You can take money out of a brokerage account at any time and for any reason — just like you could with a regular bank account — without paying an early withdrawal penalty,” according to Ramsey.
This is not the case when you have a tax-advantaged retirement account. “You would have to wait until age 59 1/2 to take money out of a 401(k) or IRA without penalty,” Ramsey explains.
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This advantage doesn’t outweigh the tax benefits if you are saving for retirement anyway. That’s why Ramsey urges maxing out your retirement accounts first. But, if you are putting aside money for early retirement or that you otherwise might need before reaching age 59 1/2, a taxable account is a better bet.
2. There are no contribution limits when investing in a taxable brokerage account
Another huge advantage of taxable brokerage accounts is that you are allowed to put as much money as you want into them. And, again, you cannot do that when you are putting money into a tax-advantaged retirement plan.
If you want to invest above the annual limits for 401(k) or IRA plans, a taxable brokerage account is likely going to be one of your only options for doing so. And if you have the extra cash to set aside, you definitely want to invest it rather than being constrained by a government cap on how much you can contribute to your account.
As Ramsey explains, the reason this is the case is because you are investing in the account with after-tax dollars and don’t get any other special tax benefits with a standard brokerage account.
“You’ve already paid income taxes on the money (from your paycheck), so the government doesn’t care about how much you invest. And besides, the government will hit you with capital gains taxes later, so they’ll get their taxes anyway,” Ramsey’s blog says.
3. There isn’t an income limit on who can contribute to a taxable brokerage account
Finally, the last big benefit to 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 are making a lot of money, this could be a big advantage of standard brokerage accounts.
For all of these reasons, it’s worth considering opening this type of account. While Ramsey says you should claim tax breaks first, he makes clear that he believes investing in a taxable brokerage account is an especially ideal choice if you’re planning for early retirement or saving for other long-term financial goals.
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