Today I want to talk about one of my favorite investment accounts.

The taxable brokerage account.

Now, the taxable brokerage account doesn't get as much love as some of the retirement accounts (401k, IRA, HSA), because it doesn't have any fancy tax advantages.

However, it’s still a powerful wealth-building tool, especially if your goal is financial independence.

Here are the benefits:

Who can open an account?

As long as you’re 18 years or older, you can open a brokerage account with a broker such as Vanguard, Fidelity, or Charles Schwab and start investing today.

Opening the account should only take 10-15 minutes.

And with fractional shares, most brokers allow you to start with as little as $1.

Are there income limits?

Roth IRAs have limitations for those making $161,000 (single) and $240,000 (married).

However, taxable brokerage accounts have no income limits.

Your income level doesn't affect your ability to open a taxable brokerage account.

Are there contribution limits?

Due to their tax advantages, the IRS limits the amount of money you can contribute to a 401(k) ($23,000) and IRA ($7,000).

But with a taxable brokerage account, there are no contribution limits.

You can invest as much or as little as you want in any given year with no limitations.

What are my investment options?

With a 401(k), you’re limited to your employer's investment selection.

But with a taxable brokerage account, you can invest in any product your brokerage offers. That includes…

• ETFs

• bonds

• stocks

• mutual funds

• target-date funds

When can I access my money?

Unlike an IRA or a 401(k), you can withdraw your money at any time, for any reason, with no tax or penalty from a brokerage account.

And there are no required minimum distributions, either. So you can keep your money in your account and let it grow until the day you die.

Are there any tax benefits?

Brokerage accounts have preferential tax treatment.

Aka - long-term capital gains.

Long-term capital gains are taxed at a substantially lower rate than ordinary income, and only taxed when you sell at a gain.

Note - dividends received from stocks in your taxable brokerage account are taxed as either ordinary or qualified (that’s for another newsletter).

To qualify for long-term capital gains treatment, an investment must be held for more than one year.

Long-term gains are subject to tax rates of 0%, 15%, or 20%, with 20% being the highest

What is tax-loss harvesting?

Tax-loss harvesting is a strategy used in taxable brokerage accounts to reduce taxes by selling under performing assets to offset capital gains or up to $3,000 of ordinary income.

For example, Let’s say you bought a stock for $10,000, but its value dropped to $7,000. You sell it and realize a $3,000 loss.

Later that year, you sell another stock for a $3,000 gain. By using the $3,000 loss to offset the $3,000 gain, you avoid paying taxes on the gain. If you don't have other gains, you can deduct up to $3,000 from your regular income, reducing your taxable income for the year.

And any losses in excess of $3,000 can be carried forward to future tax years.

What happens to my brokerage account when I die?

The step-up basis is a tax provision that adjusts the value of your brokerage account when you die.

Instead of your beneficiaries using the original purchase price, the cost basis is adjusted to the fair market value of the brokerage account at your death.

For example, if you bought a stock at $50 per share, and it was worth $100 per share at the time of your death, the new cost basis would be $100 per share.

Essentially, you’re able to pass down your brokerage account to your heirs tax-free.

Closing thoughts…

TL;DR

• Anyone can open an account

• No income or contribution limits

• Unlimited investment options

• Withdraw money at any time

• Preferential tax treatment

• Tax-loss harvesting

• Pass down to heirs tax-free

Don’t overlook the benefits of a taxable brokerage account. Sure, tax-advantaged accounts are nice, but so is flexibility.

Pairing a taxable brokerage account with a tax-deferred and tax-free account is a recipe for financial success.

Darrell