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Taxable Accounts 101

Are you wanting to invest more than your 401K/IRA/Roth IRA limits OR are you wanting to invest money that you are unsure when they will be used? A Taxable Account might be for you! A Taxable Account, or “individual/JTWROS”, has unique characteristics that allow you more flexibility on the funding and use of funds than any other account.

The flexibility of taxable accounts:

  • No minimum or maximum contribution- you are welcome to invest as little or as much as you would like
  • No income limits- no matter your income, you can take advantage of a taxable account
  • No penalty for using your monies before retirement age, like 401Ks, IRAs or Roth IRAs.
  • Potential tax minimization for yourself and your heirs
  • No required minimum distributions

Having no minimum or maximum contribution allows you the flexibility of investing extra cash to save for retirement, without the worries of a 10% penalty if an unexpected expense comes up and you need access to your cash. If the investments are held for longer than 365 days, your gains will be taxed at long-term capital gains. Currently, long-term capital gains tax brackets are 0%, 15%, or 20% depending on your taxable income. If the investments are held under 365 days, your gains are treated as short-term capital gains and are taxed at your current tax bracket. If there is a loss in the investment account, you can deduct up to $3000 per year from your taxable income.

Other tax advantages of taxable accounts include controlling your taxable income in retirement. Having a portion of the money that you will only pay capital gains tax on the gains, could allow you to avoid jumping into the next tax bracket. Taxable accounts are also great for certain investments. If your overall portfolio includes municipal bonds, they could be placed in your taxable account. Since municipal bond’s income is exempt from federal taxes and in most cases state taxes too, your income from those bonds can significantly minimize your capital gains taxes. Since taxable accounts do not have required minimum distributions (RMDs), an age where you are forced to take out the money (so Uncle Sam can get his tax dollars), there is no need to use the funds in the account until you want to. If funds go unused and are passed on to your beneficiaries, your beneficiaries receive a step-up in cost basis. This means they receive the funds at the price of the investment when you pass. This creates a tax advantage to your beneficiaries as their new cost basis will be a step-up if the investments have made money, reducing their taxes paid if they choose to use the funds.

If you have any questions about a Taxable Account or would like to learn more, please give us a call 913-681-9155 or send me an email Taylor@engageadvisors.com

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Engage Advisors, LLC is a Registered Investment Adviser. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Engage Advisors, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Engage Advisors, LLC unless a client service agreement is in place.