When Should You Save Retirement Money In A Taxable Account?
Retirement (Photo credit: 401(K) 2012)
Everyone knows that when you are saving for retirement that you must use tax efficient accounts like IRAs and company 401Ks. Using tax deferred growth is one of the best ways to grow your retirement nest egg.
Though tax savings accounts are the best way to invest for retirement, sometimes a taxable account is the right choice even though you will be taking a tax hit. Here are a few situations when a taxable account makes sense even though it will cost you some taxes.
You may have to save for a goal that will come within a short period of time. This could be an emergency fund that you are building. Putting the money into an account like an IRA, a 401(k), or a college-savings vehicle such as a 529 just wouldn’t be practical. The reason being if it turns out you need to tap the tax-sheltered assets prior to college or retirement, you’ll have to pay penalties and/or taxes to get your mitts on those assets.
Taxable account have no rules or restrictions on withdrawals. Though you will pay taxes on any gains, there are no penalties on withdrawals.
With tax-free or tax-defered investing we have many choices of accounts at our disposal. We have so many accounts to choose from like Roth IRAs, 401ks, 529 plans, and Coverdell accounts, all help with our investing goals. We may not know how or where our money may be needed at this point in time. We may be waiting for a child to enter or finish college. A change of job may be making us wait for another job to start and investing must stop. We could be saving up or holding money aside for a new roof or second home. All these options directs us to save in accounts that are not tax-efficient.
Planning for the future use of our money also depend on our age. If we need the money short-term, then a Roth account may work if we need the money when we are 59 1/2 or older, when we can take it out penalty free. If we our too young to use this strategy, then the money belongs in a taxable account.
It may be the case that all retirement accounts are fully funded under IRS rules. If you still have money after using all your retirement account options then a regular investment account will have to do. Investors in 401(k) plans are limited to $17,000 in annual contributions if they’re under 50 and $22,500 if they’re over 50. IRA investors can contribute $5,000 a year if they’re under 50 and $6,000 if they’re over 50. (College savers aren’t likely to hit this roadblock, as 529 contribution limits, while varying by state, are extremely generous.) If you find yourself in the position of having maxed out all of the tax-sheltered retirement vehicles available to you, saving additional assets in a taxable account will be a necessity.
Category: Retirement
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