Saving in your employer’s retirement plan has several potential advantages, including the reduction of your current taxable income, tax-deferred compounding, and possibly an employer match. But have you thought about the potential benefits of supplementing your tax-deferred retirement savings with a taxable investment account? There are a number of potential advantages to doing so.
Flexibility in Investing
Investing in a taxable account allows you to accumulate funds without the withdrawal restrictions that may apply to your retirement savings account. You can invest as much as you want regardless of your income level. And your investment choices typically will be much broader than those offered by your retirement plan.
Favorable Capital Gains Rates
If you decide to sell any investments that have increased in value in your taxable account, capital gains are potentially taxable in the year of sale. Net long-term capital gains are taxed at rates between 0% and 20%, depending on your ordinary income tax bracket. In contrast, when you withdraw funds from a tax-deferred retirement account, you’ll generally pay income tax on both contributions and earnings at your ordinary tax rates (unless the withdrawals are either qualifying Roth distributions or include after-tax contributions).
In a taxable account, a capital loss from selling investments that have decreased in value since you purchased them can offset capital gains you have elsewhere. Additional capital losses may be used to offset up to $3,000 of ordinary income per year ($1,500 for married individuals filing separate returns). Any excess losses not claimed during the current tax year can be carried over to future tax years, subject to the same limits.
Estate Planning Advantages
Generally, investments in your taxable account that have increased in value will receive a step-up in cost basis to their values at the time of your death. This rule may provide a substantial tax break to your heirs, who will measure their capital gains from these date-of-death values.
If you have any questions on the above article, contact Security National Bank Wealth Management below.
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